In this latest instalment of StraitsX Sessions, Kenny Chan, Head of StraitsX, sits down with Blockhead for Episode 13 of Blockcast, exploring all things about stablecoins and upcoming plans for StraitsX.
Blockcast is a podcast run by Blockhead, a digital assets-focused media platform that's Asia-led and global in scope, covering the most important industry trends and developments.
Read the transcript of Kenny’s inputs below.
Kenny Chan, StraitsX: I think you need to go back many years in history to understand this [stablecoins] a little bit better. When some of the original cryptocurrencies, [such as] Bitcoin and Ethereum first came out, it wasn’t very easy to trade in and out of these [crypto] currencies. Maybe you were able to get access to an exchange, but the trading was done between actual [fiat] dollars and your target cryptocurrency of choice.
At a certain point, the innovation of stablecoins came out as a more efficient means to stay within the cryptosystem, by having an asset to trade against relative to that other cryptocurrency. Yes, it was a token, a coin within the crypto and blockchain ecosystem. But it was meant to be stable, unlike many of the other volatile assets. So that was kind of the origin of stablecoins.
The use cases have [since] evolved quite a bit. They are definitely still used as a trading tool against other more volatile crypto assets, but they are also used just by themselves. We see tons of transactions happening, especially in emerging markets where maybe the banking sector is not fully developed. Maybe the local currency has inflation or other volatility issues where you see stablecoins being used as a method of transferring value from one user to another or even paying a merchant for goods and services received. This is what we want to see, not just for the trading in and out of other current cryptocurrencies, but also as a means of using the stablecoin itself for actual settlement of value.
Kenny Chan, StraitsX: There are many different [types of] stablecoins, but if we take a step back from that, we should just start with the token itself. It’s very easy to launch any sort of token [on the blockchain] and we can use the Ethereum blockchain as an example here. The token doesn’t necessarily have to be backed up by anything. That’s actually the case for the majority of tokens that you see out there. Now, there’s a special class of tokens out there that calls themselves stablecoins that want to keep a value [or] a pegged value to something else, and so what makes the stablecoin different from all these other tokens out there [on the blockchain]? There must be some attempt to keep the value stable.
You mentioned algorithmic stablecoins. That’s when there’s something, in terms of the issuance or the supply algorithm, maybe trading against a different asset that attempts to kind of peg that stablecoin to 1 dollar. The most famous example over recent history is Terra UST, which I think grew up to about $40 billion in market cap at its peak. I think we all learned a painful lesson at that time that algorithm stablecoins - while very interesting, are not easy to do right, and can lead to some pretty catastrophic outcomes.
You also mentioned cryptocurrency-backed stablecoins. I guess the one we are most familiar here with would be DAI. This is a case in which a user is able to lock up another cryptocurrency; In this case, say Ether, they’re able to mint stablecoin off of that. So let’s just say that you have $2,000 worth of Ether and you’re able to lock that up and withdraw, say $100 worth of DAI. That allows you to use the $100 of DAI as a normal stablecoin. And as long as the value of Ether never falls below that $100, you can be pretty sure that you can always redeem your $100 worth of DAI back into Ether.
And the final category, which is what we at StraitsX focus on is what we all call fiat or cash-backed, reserve-backed stablecoins. Instead of relying on the algorithm or relying on other cryptocurrency assets directly, we’re relying on cash and reserves held in a bank. So, we at StraitsX are the issuer of XSGD. Every single XSGD token that you see on the blockchain actually has a corresponding 1 Singapore dollar in a bank account or in a treasury somewhere. The way that we maintain the peg is - if any user comes to us with a token, we will always deliver back to that user 1 SGD of actual fiat.
You mentioned about de-peggings, I think the easiest way to talk through this is just to rewind in time, about a year ago when Circle and USDC had their depegging event, and just kind of go through what happened in terms of the actual market pricing, as well as the actual redemption values to actually understand what’s happening with that stablecoin. At a certain point, when the U.S. banking sector was facing some challenges and there was concerns around Silicon Valley Bank, which is one of the custodians of some of the Circle or USDC reserves, whether Silicon Valley Bank would actually go bankrupt or go under.
Many of the market participants started to get concerned that USDC would not have enough reserves to pay out all of the outstanding tokens that were out there. So, what you saw in terms of the price – when you see the de-pegging when it went below a dollar, I think it went as low as 80-something cents, was a market-based price. That was one user, or a collective of users, willing to sell their USDC. Not 1 USDC for $1, but actually 1 USDC for something less than a dollar.
That didn’t actually impact the eventual ability for Circle or USDC to redeem those tokens. There were a few days of chaos, [and] a few days of market volatility, but actually, within a week or so, you saw that the market-based price had actually gone back to $1. And the reason for that is because the entire time the reserves were just sitting in a bank. It was just a matter of concern around whether Silicon Valley Bank would actually go under and whether the reserves would fully be there to back up all the tokens.
And so in our case with XSGD, I don’t think we’ve ever experienced even a market-based de-pegging. And when it comes to redeeming the stablecoins themselves, we’ve always been able to honour, say 1 XSGD is worth 1 SGD.
Kenny Chan, StraitsX: In order for a stablecoin to maintain its peg, there are 2 main things we can do.
The first is just proving that the reserves are there. So this is something that we do once a month. We use a certified auditor who will go through all of our bank accounts, as well as look at all of the tokens that we have available on all the different blockchains that we’re on. They’re able to testify that the amount of reserves that we have is actually equal to, or more than the amount of tokens that are floating out there. Which means that if any of the users were to come to us with a token, we would have enough reserves to redeem that token.
The second thing that we could do is just never have any issues when it comes to redeeming the token itself. So let’s just say that - we say that all the tokens are fully backed, but you want to test this out for yourself. You as the end-user - you bring us, say $100 or maybe even $100,000 of XSGD. You say - “Hey do you have the actual fiat to back this up?”. We’ve never had an issue with that either.
In addition to attestation reports which we do on a monthly basis, from a redemption standpoint - whenever any user has come to us, we actually have all the fiat there just waiting for the customer to redeem. Because we’re able to honour those redemption requests in such a fast and efficient amount of time, it does also create additional trust from the user's perspective that they know that if they were to bring us a token, the fiat is also there.
Kenny Chan, StraitsX: The reserves consist of on-demand cash deposits and government bonds. In this case, for cash, there is some amount of trust placed on the bank. The bank would hold the cash for us, but from the government bond perspective, the credit risk is really on the government itself. As long as the government is still stable and able to issue new bonds, the reserves should still be there.
We don’t use any bank bonds or any sort of corporate credit like that. There’s additional credit risk that you might face if you’re holding assets such as that. So, we’re only using what we consider to be the highest quality liquid assets that you can find out there.
Kenny Chan, StraitsX: Certainly, they could [enter into the stablecoin business]. A bank is another private institution just like us, or just like any institution out there that might want to do this. But I think there are probably a few different things that are stopping them from doing so. The first of which is [that] this is not really their expertise – Banks are good at keeping money safe, and then taking that money, and lending it out at relatively safe and attractive investment opportunities. Whether it’s in the form of consumer credit or mortgages. It is a very fiat-based business model that they have. In order for them to compete in this market, they also kind of need to understand what is a stablecoin; how to mint it, how to redeem it, and what is the operational flow that you need to make sure that the stablecoins can be redeemed pretty much instantly. It is not something that is beyond learning. Certainly, the banks could learn how to do this, but if they were to start this business today, I would expect that there’s at least some amount of a ramp-up period as they figure out the operations.
The second is – let’s just assume that the bank was able to figure this all out. They have figured out all the operations and they have the best mint and redeem process out there. There is still the additional challenge of so what if this token is floating out there? If you don’t build the use cases for it, then there is less of a reason to hold that stablecoin itself. So what we’ve been doing for over many of the last few years is integrating XSGD into traditional consumer finance use cases.
Actually even today with some of the pilots that we ran as part of Project Orchid, we are experimenting with cross-border payments, using stablecoins to settle between two different parties. There’s also an interesting company out there that we’re working with called BasedApp. They allow you to hold your XSGD on a blockchain address where you fully own that token yourself, but you’re able to put it on a Visa card and spend it or anywhere that accepts cards.
These are all kind of use cases we’ve built that requires some amount of understanding of both the traditional financial sector as well as the blockchain world. The bank would need to do all of that integration work as well. They would need to understand the technologies and build those relationships, not just in the traditional financial sector but in the crypto sector as well, to make sure that there’s a reason to hold stablecoins. There are plenty of other reasons actually why banks wouldn’t want to get into this, but I think, at a high level, these two reasons are probably the two biggest ones.
Kenny Chan, StraitsX: Some of the things that we’re working on is to eventually build what we call “real-world use cases” involving stablecoins. This is something that we’ve been working on for a long time, but this is also a multi-year effort before you see this widespread out in the market. In the meantime, as you’ve also mentioned, stablecoins are still the most efficient way to trade in and out of crypto. If you think about it from a user standpoint, they get a better deal in terms of speed and efficiency when they’re using stablecoins to trade in and out of other crypto assets than if they were to use fiat directly. There’s less settlement time.
So let’s just say you send a fiat into an exchange. Because of stablecoins, you’re able to start trading immediately, allowing users to capitalise on quick market movements that they might want to take advantage of. The other way around as well - let’s just say that you as a user think that there’s a volatile market event coming up. Because of the stablecoin infrastructure, you’re able to, say, trade out of Ether or BTC into a stablecoin immediately, protecting your assets rather than allowing some sort of fiat settlement process which actually could take days, especially the risk that comes with waiting for your fiat to settle within that period.
So from a portfolio diversification and risk-mitigating perspective, stablecoins allow the user to have much more control over their crypto assets and the amount of volatility they’re willing to accept in general.
Kenny Chan, StraitsX: In addition to some of the trading and real-world use case examples discussed, you can, as a user, provide liquidity between XSGD and USDC. We’re available on UniSwap and a few other DeFi protocols.
So let’s just say that you had some needs to convert between the Singapore Dollar and the US Dollar. You’re able to do this probably cheaper on UniSwap, relative to most traditional financial services providers today and get an instant settlement and better FX pricing than you would say, going to a bank or another financial services provider. So, both in terms of providing liquidity so that you could generate fees on your capital, but also to be a user of LP itself to convert between Singapore Dollars and US Dollars. That’s all available today as well.
Kenny Chan, StraitsX: The company was started in 2014 as a brand called Xfers. The main business line back then was providing payments between other businesses. So think about this as a B2B payments type of company. After a few years, we noticed that one of the unmet needs in the market was serving crypto exchanges. Crypto exchanges had a lot of difficulty getting access to banking rails. So what we did was we helped provide the fiat services to their end users.
At a certain point, some of the teams were interested in stablecoins themselves. So, the team decided to launch XSGD stablecoin in 2020. This was both a passion project of the team and something that some of our users were expecting. We had certain vendors that were looking for a way to instantly settle with a few of our other vendors. Having the XSGD token allows, say vendor A to settle with vendor B immediately without us needing to record any transaction between them.
What started as that small need has then turned into what XSGD is today, which is a lot more than just settlement between vendors. There’s the on and off-ramp service that we provide. There’s also a connection between the DeFi protocols with our fiat banking rails. And there are all the real-world use cases that we’re trying to build, integrating with the traditional financial sector. So what started as a passion project now has many different streams of initiatives that we’re trying to improve now.
Kenny Chan, StraitsX: First, I just want to say that we’re deeply honoured to be among one of the first to be acknowledged by MAS to be compliant with the upcoming stablecoins framework. This underscores StraitsX - our reputation as a responsible digital asset provider. You mentioned the question of how does this impact the end users. The reality is - we’ve always attempted to be one of the most responsible digital asset providers in the market. This doesn’t change anything in the market from the user's perspective. Because we will still provide the same services, but be regulated under a more stringent framework, which thus should provide the user even more trust to use our stablecoin and our services.
Kenny Chan, StraitsX: The IPAs mark an important milestone in terms of MAS providing regulatory guidelines for responsible development and innovation in the digital asset space. It pushes service providers like us to actively deliver greater value to end users more confidently all within a regulated framework.
There are a few things that the IPA mandates from the stablecoin issuers. All of these are meant to build additional trust for the end consumer and other players in the Singapore digital asset ecosystem.
Firstly, value stabilising mechanism. This is to ensure that any stablecoins issued are always pegged or backed 1:1 with a cash or government debt security. There are also guidelines around the redemption mechanism that any holder of XSGD can always come to us and redeem their token for fiat within the specified guidelines.
There’s the segregation and custody of reserve assets, ensuring that customer assets are completely segregated from corporate assets and safeguarded. Finally, prudential requirements. This is to ensure that we, as a company, always have enough not only reserves to redeem whatever assets that the customer holds, but from an operating standpoint, we have enough reserves to ensure that we, as a company, can always continue to run and able to serve whatever client redemption requests come towards us.
So these are just a few of the guidelines that are part of the IPA. They’re all intended to create trust within the ecosystem.
Kenny Chan, StraitsX: I hope to live in a world where one day we don’t have to think about stablecoins as a separate asset. We just use stablecoins anywhere in the world as you do with fiat or your credit card. You might not even know that it’s stablecoin powering that transaction. So, in some ways, I think maybe the best outcome for the stablecoin industry is if the word “stablecoin” just disappears. We just use the service, rather than talking about it all the time. I think that would go a long way in terms of building out use cases for the whole ecosystem.
Kenny Chan, StraitsX: You’re going to see a lot more of launching on new chains. New currencies will be launched as part of the IPAs granted to us. One of them was specifically for the issuance of a USD stablecoin. However, I’m most excited about more integrations with others in the DeFi ecosystem and some traditional financial services providers. Ultimately, we’re just trying to build more use cases so that XSGD users will have a bunch of more things that they could explore with XSGD.