A pharmaceutical firm is suing stablecoin provider Circle and demanding a refund after its CEO “accidentally destroyed” $1 million worth of USDC by sending it to the wrong wallet address. 

CelaCare filed the lawsuit in a Massachusetts district court this week that claims the USDC was “permanently destroyed” after its CEO, Kenneth Yates, entered the wrong Ethereum wallet address. 

The USDC was sent from CelaCare’s Coinbase account to a contract counterparty on July 3, 2024. The lawsuit claims, “When Yates used his computer to copy the destination address from a document sent to him by the counterparty, Yates’s computer erroneously transcribed a B as ‘8’.” This transcription error seems to have arisen as the CelaCare CEO attempted to copy and paste the address from a PDF and failed to verify the results.

As a result, CelaCare claims that Yates sent the crypto to an inaccessible wallet address that has no owner. In order to convince itself that the funds were truly inaccessible, it sent a message to the address which reads, “On July 3, 2024, Celacare Technologies Inc. sent one million USDC to this address erroneously. If you have the private key to this wallet address, please send 1.46 USDC to any address and contact us at charlie@gerstein-harrow.com.” It did not receive a response. CelaCare argues this renders the USDC destroyed. 

Read more: OpenSea hit with Wells notice, says SEC lawsuit will ‘misinterpret law’

It says that Circle should refund the crypto as the firm’s USDC stablecoin is classed as a “financial asset” while Coinbase is classed as a “securities intermediary” under the Uniform Commercial Code (UCC). Because of this distinction, CelaCare claims the UCC legally requires Circle to either reissue the funds, or “honor them.” 

The firm wrote to Circle on August 15 with the drafted lawsuit attached and asked Circle to return the funds. However, on September 6, Circle’s counsel refused CelaCare’s refund request.

Celacare is seeking a trial by jury and wants the court to declare that the USDC was destroyed. It wants to receive $1 million, either in USDC or fiat, or issue Circle the same $1 million value in damages.

Tether, the largest USD-backed stablecoin, offers a token recovery service where it will (at its discretion) burn and re-issue tokens in cases like this for a 10% fee.

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Circle, the company that issues USDC, announced on February 20 that it would no longer be continuing support for the stablecoin on the TRON blockchain and is pushing for a phased transition away from the Justin Sun-created crypto by February next year.

This gives users exactly one year to transfer any USDC they hold on the TRON blockchain to one of the other blockchains that USDC is issued on. These include Ethereum, Solana, Algorand, and 11 other blockchains.

Circle has already scrubbed TRON as a supported ecosystem on its website.

The sudden move could also be seen as a shot at Tether (USDT), the largest stablecoin by market cap and volume. Tether has, according to its own transparency page, issued more than half of its stablecoins on the TRON blockchain. This equates to $52 billion worth of crypto.

Read more: Circle emphasizes that Justin Sun is not sanctioned… yet

Circle didn’t expand on why it was making the decision to remove TRON from the long list of blockchains that it currently supports, other than that it’s a “result of an enterprise-wide approach that involved the business organization, compliance and other functions across [Circle].”

The suggestion from the blog post is that TRON lacks the transparency and characteristics that Circle needs from a blockchain to utilize it. At worst it implies that Sun’s latest actions around his exchange HTX and algorithmic stablecoins such as USDD have tainted everything that the former diplomat has touched. It’s unclear if further developments for TRON and Sun are coming down the line from US law enforcement or politicians.

Circle and other stablecoin operators took shots at Tether in front of Congress last week. Regardless, it means that an important stablecoin with a large US base has decided against using Sun’s cryptocurrency. Sun responded via a vague X (formerly Twitter) thread stating that he “support[s] each developer’s development decisions.”

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Tether has released the most recent assurance through the end of 2023, which claims continued growth in total reserves, profits, and excess reserves. 

Tether, in its announcement regarding these financial results, bragged that “the fourth quarter witnessed a record-breaking net profit of $2.85 billion, of which ~$1 billion in net operating profits (were primarily interests from US Treasuries) with the remaining primarily from the appreciation of Gold and Bitcoin reserves.”

This growth in profits has funded some of Tether’s new investments, with Tether claiming that it used $640 million of the profits from this quarter to fund its venture investing, something that is now managed “within a new segregated VC umbrella.” Tether has recently been actively invested in energy, mining, staking, and other industries. 

These investments are now purportedly under this new “VC umbrella,” but Tether has been an active venture capital investor for years before this, leading the first equity round in Celsius and the token issued by Samsom Mow’s Infinite Fleet game. 

Read more: Tether says it makes money but can’t ditch loans

Additionally, Tether made the claim that it had finally reached the point where “the outstanding secured loans, which are collateralized by highly liquid assets as confirmed in the BDO attestation, are fully covered by the undistributed accumulated profits known as excess reserves.” This is important because at the end of 2022, Tether made the assurance that it would “reduce secured loans in Tether’s reserves to zero.”

Whether or not Tether has achieved this goal depends on whether you consider the category “excess reserves” to be part of the reserves.

Over the three months since Tether’s last assurance, its market cap has grown by approximately $8 billion. Its claimed reserves have grown by over $10 billion. Tether’s largest competitor, Circle, has not seen the same performance over this period; its market cap and amount held in reserves have shrunk by over $300 million.

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This year permanently changed the cryptocurrency ecosystem as it grappled with last year’s collapse of FTX, Alameda Research, BlockFi, Voyager, Celsius, Babel Finance, Three Arrows Capital, and more.

While still reeling this year, we also saw important cases against Sam Bankman-Fried, Alex Mashinsky, Do Kwon, Changpeng Zhao, and Binance. The reverberations of these events permanently altered the industry.

Here’s a review of how top stablecoins like Tether, Circle, and TrueUSD have fared in 2023.

Tether

Tether took on an even more dominant position in the stablecoin ecosystem in 2023. Despite years of criticism aimed at management, Tether has continued to grow. Its market cap increased by approximately $24 billion, or more than 35%.

Tether has been able to take advantage of the higher rate environment to improve its claimed financial position. The firm’s stated excess reserves increased from around $1 billion at the end of last year to about $3 billion at its latest assurance. 

This increase in assets has allowed Tether to make investments across a variety of different industries.

Read more: Tether says it makes money but can’t ditch loans

Tether historically has attracted the attention of law enforcement regulators, previously settling with the New York Attorney General and Commodity Futures Trading Commission (CFTC), as well as several years ago reportedly receiving target letters related to bank fraud.

This year, Tether has worked on improving its relationship with law enforcement. Onboarding the Secret Service and the Federal Bureau of Investigations to its platform in 2023 enabled the agencies greater insight into how the firm operates. 

Circle

USDC, the stablecoin issued by Circle, has had a much more challenging year than Tether. The market cap of USDC has significantly contracted, falling from approximately $44 billion to $25 billion, or almost 45%.

There were a number of factors that contributed to this fall, but it’s crucial to focus on the USDC de-peg that followed Silicon Valley Bank’s failure. As Circle had lost access to a variety of its other banking partners, it had a significant share of its reserves at Silicon Valley, and that entity’s failure threatened the stability of the stablecoin.

Circle has also not seen the same increase in excess reserves that Tether has, recording around $140 million at the end of last year and about $50 million at the most recent attestation. 

Circle’s leadership has reacted to this shrinking market position by lashing out at its competitors, accusing Tether of “counterfeiting” the US dollar.

Read more: The beef between Circle and Tether

Binance USD

Binance USD (BUSD), the Binance-branded stablecoin launched in collaboration with Paxos, has had a brutal year since it was effectively shut down in February.

The New York Department of Financial Services prevented Paxos from issuing new BUSD tokens in February, highlighting the mismanagement of Binance Peg BUSD.

Binance had failed to appropriately keep the BUSD backing BUSD on Binance chains separated, potentially leaving the Binance Peg BUSD without appropriate reserves.

Read more: Binance’s stablecoin BUSD hasn’t always been 1:1 backed, report

Since Paxos was ordered to stop issuing the token, its market cap has collapsed from $16.4 billion to approximately $1 billion, a fall of almost 94%.

Paxos’ own stablecoin Pax Dollar somehow still has a smaller market cap than BUSD, totaling only $370 million.

TrueUSD

The market cap of TrueUSD, a stablecoin that Techteryx issues, rose from about $750 million to about $3.5 billion at its peak before falling to about $2.4 billion.

TrueUSD has grown in part thanks to Binance adopting TrueUSD as one of its ‘zero-fee’ trading pairs, a fact that immediately helped its growth.

TrueUSD’s more important role in the ecosystem has also highlighted some of the strangeness surrounding its management.

Read more: The Context: Stablecoins get a little help from their friends

Techteryx acquired TrueUSD in 2020, denying any connection to Justin Sun at the time and emphasizing that Techteryx would not be in charge of managing the private keys. Eventually, Sun would be listed as an ‘Asia Market Advisor’ on TrueUSD’s website and described himself as a “partner market maker” for the token.  

In May of this year, Archblock acknowledged that private keys for TrueUSD were transferred to the Techteryx team. 

Since then a pro se lawsuit filed by the former chief of TrustLabs (the firm previously behind TrueUSD), Daniel Jaiyong An, more clearly alleges that Sun tried to acquire TrueUSD in a deal negotiated with Can Sun, who would later serve as counsel for FTX.

First Digital USD

First Digital USD (FDUSD) is a stablecoin launched by First Digital Trust, one of the custodians of TrueUSD. Additionally, the fact that it is now a “zero-fee” pair on Binance has accelerated its growth, overlapping with the recent movement away from TrueUSD. 

FDUSD launched this year, growing to a total market cap of approximately $1.8 billion. 

Earlier this year, Bloomberg also reported that Binance was collaborating with trading firms and stablecoin issuers to come up with alternative structures to hold collateral for the token, and First Digital USD launched a couple months after that reporting. 

USDD

USDD, a stablecoin that claims to be “algorithmic,” is the largest “algorithmic” stablecoin remaining following the collapse of Terra and Luna in 2022. 

USDD started by effectively co-opting the mechanism design of Terra/Luna and promising to integrate it directly into Tron in the same manner that the issuance and exchange were integrated on the Terra blockchain. 

The ‘algorithm’ for USDD can broadly be described as: 

• Members of the “Tron DAO Reserve” can transform Tron (TRX) into USDD by “burning” it (not really burned, as it’s considered ‘collateral’ for USDD) and then they are issued USDD.
• Users can also access “authorized and unissued” USDD by sending other stablecoins to its “Peg Stability Module.”
• Redemptions are managed by sending USDD back to the “Peg Stability Module” in exchange for stablecoins held by the “Tron DAO Reserve.”

Read more: Binance delists ‘stablecoin’ AEUR after it pumped 200% on launch

The current members of the Tron DAO Reserve are:

• Amber Group (recently raised a $300 million round after the FTX collapse exposed some of its products to potential collapse)
• Poloniex (owned by Sun)
• Ankr
• Mirana Ventures (the venture arm of ByBit currently being sued by FTX for its withdrawals immediately before the collapse)
• Multichain (a bridge which has been stopped since July and apparently had its CEO, who managed all keys, arrested)
• FalconX (had approximately 20% of its assets on FTX at the time of the collapse)
• TPS Capital (that would be the Tai Ping Shan which was a Three Arrows Capital OTC desk)

The market cap of USDD has stayed roughly flat for 2023, coasting around $715 million.

Conclusion

Stablecoins continue to serve an important role in the cryptocurrency ecosystem, especially as many exchanges and firms struggle to maintain consistent access to US dollar rails. 

Over the last year, important US domiciled stablecoins like USDC and BUSD have seen their market caps collapse as ‘international’ stablecoins like USDT, TUSD, and FDUSD have exploded. 

Algorithmic stablecoins are effectively ignored following the collapse of Terra and Luna, with the largest remaining “algorithmic” coin seeing effectively no growth. 

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Circle and Tether have been battling for stablecoin market supremacy for several years but recently things have escalated with a series of increasingly public spats between the two firms. 

Earlier this year, USDC suffered a de-peg, and Circle, which had stored billions with Silicon Valley Bank (SVB), duly failed. Tether’s chief technology officer Paolo Ardoino described the company’s reserve management around the SVB failure as a “basic mistake in risk management.”

Tether has been criticized for its own reserve management in the past and has reached several settlements with the New York Attorney General and Commodity Futures Trading Commission (CFTC). These relate to undisclosed related party loans that followed the loss of access to hundreds of millions of dollars stored at an unlicensed money transmitter accused of money laundering for the Colombian cartels.

Dante Disparte, chief strategy officer at Circle, stated that concerns over its SVB deposits are “risk reduction to absurdity.”

Reportedly, Coinbase was prepared to step in to help USDC during its de-peg, offering a $3 billion line of credit to help backstop the stablecoin. However, this line of credit ended up being unnecessary after the government chose to backstop SVB depositors.

More recently, Disparte spoke at the Federal Reserve Bank of Philadelphia Annual Fintech Conference, where he opined that “one half” of the stablecoin market is “counterfeiting the US dollar” and blamed it on “US inaction on policy and regulation.” The only coin with more than half the stablecoin market is Tether, meaning this would seem to be an accusation that Tether’s reserves differ so drastically from Circle’s that its activities are uniquely counterfeiting.

This is a more explicit call-out than previous comments Disparte has made about whether or not people should “be able to counterfeit US dollars using cryptographic methods.”

Circle and Tether have been vying for influence in the stablecoin market for the last several years, and similarly, both have deployed resources to influence the policy and regulation discussion in the US.

Read more: PayPal stablecoin can be frozen like Tether and Circle

Over the last several months, USDC has seen its market cap decrease as Tether’s has continued to grow despite the bear market and rising rate environment.

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Crypto exchange Coinbase reportedly offered a $3 billion lifeline to Circle as its stablecoin USDC de-pegged as a result of Silicon Valley Bank’s (SVB) collapse, according to a person familiar with the arrangement speaking to Fortune.

Circle was able to withdraw the majority of its funds before SVB and Signature Bank experienced bank-runs earlier this month. However, $3.3 billion remained locked in deposits at SVB. The immediate line of credit by Coinbase would have ensured USD Coin reserves were liquid and returned the stablecoin’s $1 peg, according to the source. 

USDC’s market cap is $39 billion — the $3 billion locked, while a drop in the bucket in comparison, caused traders to lose confidence in the stablecoin. Its price slipped down to $0.88 on March 11 and eventually clawed its way back up to $1 by March 13.

Coinbase had a lot at stake if USDC never re-established its peg. USDC is managed by a consortium called Centre, founded by Circle. Members include Coinbase and Bitcoin mining company Bitmain, an investor in Circle.

• Coinbase partnered with Circle in 2018 to bring the stablecoin to market.
• In 2021, Coinbase chief Brian Armstrong went head-to-head with the Securities and Exchange Commission (SEC) when it threatened to sue regarding its USDC lending product.
• Coinbase scrapped the project soon after.

During the pandemonium, Circle chief Jeremy Allaire disabled USDC minting and redemption through Signature Bank’s SigNet. Coinbase subsequently halted USDC withdrawals on its platform. It cited the need for US dollar transfers from banks as the cause:

“During period of heightened activity, conversions rely on USD transfers from the banks that clear during normal banking hours. When banks open on Monday, we plan to re-commence conversions,” the exchange tweeted on March 11.

Read more: Coinbase reportedly considers overseas expansion amid US crackdown

Coinbase’s line of credit turned out to be unnecessary. The US government basically bailed out USDC when it announced that all deposits at the two failed banks would be insured. Circle moved its cash to BNY Mellon.

However, Coinbase appears to not be counting on further favors from the US government. Sources told Bloomberg the exchange has reached out to partners to discuss plans to open a trading platform abroad.

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A new scam has appeared that tries to take advantage of the recent unsteadiness of the USDC stablecoin peg, by pretending to be a safe way for users to swap their USDC into Tether. In reality, attackers are draining ether from victims’ wallets.

On Tuesday, someone registered the domain name circle.blog, and began mocking up a convincing website with copies of previous news updates from the actual Circle page. The next day, the scammer posted their own update which announced a new, fictitious product called Circle Swap.

Circle Swap purported to be a partnership between Circle and TronDAO to create a new swap market between USDC and Tether, backed up with liquidity from TronDAO. The blog post linked to the supposed Circle Swap product on another domain, circledefi.center, which was registered on March 12.

The interface for this page is a copy of the Raydium application — but with its disclaimer removed and several of the links made non-functional, including the ‘docs’ page. The source for the application contains a file called ‘config.js’ which begins with the comment: “P***Y DRAINER @ Obfuscate this file with obfuscator.io,” apparently an instruction these users didn’t understand.

This file links to another address at hapewives.claims, which was registered to someone in Charlestown on the island of Nevis. Visiting that site reveals text that states: “Nothing to see pepe.”

Read more: USDC faces SEC enforcement amid stablecoin crackdown

Inside this file is also a wallet address, which Etherscan has already flagged for associations with a phishing scam. Approximately 74 ether have been sent to this address, from 80 unique addresses. 3.5 ether has been deposited in total since the fake blog domain was registered. At least some of the funds which have come out of this wallet have since been swapped through Uniswap and SideShift.

Another address is referenced in the scam, which has also been flagged by Etherscan as a phishing scam. It has received only 2.5 ether.

USDC depeg scam a stark reminder to exercise caution with DeFi

The scam seems to function by getting users to approve the website and then sign transactions which allow the attacker to remove their ether.

This serves as a good reminder that you need to be extraordinarily cautious when interacting with DeFi. Mistakes can be very costly, and often irreversible. Scammers look for opportunities, like a stablecoin depegging, where individuals may be more likely to make a rash decision and be taken in by one of these sites.

Stay vigilant.

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The Federal Deposit Insurance Corporation (FDIC) has taken over two banks at which Circle held billions of dollars worth of backing for its stablecoin, USDC. By making depositors whole at these insolvent banks, the US government has essentially bailed out USDC’s $1 peg.

Early last week, Circle held over $10 billion worth of assets at Signature and Silicon Valley (SVB) banks. Although Circle was able to withdraw the majority of its funds prior to the weekend when both banks went under, it still exceeded $3.3 billion on deposit as they failed.

In other words, on Saturday, at least 8% of the value of USDC’s $39 billion market capitalization was locked within two insolvent banks. By Sunday, the US government had restored that loss.

The price of the so-called stablecoin had slipped into the $0.80s. After a joint statement from the US Treasury, Federal Reserve, and FDIC, traders regained confidence and bid the token’s price back up to $1.

A bailout for DeFi’s most popular denominator

During the crisis, Circle CEO Jeremy Allaire disabled the minting and redemption of USDC through Signature Bank’s SigNet.

Circle controls the administrative keys needed to blacklist particular USDC tokens. The company also controls the issuance and redemption of USDC for USD, which is further constrained by the US banking system.

Allaire initially expressed confidence that Circle would enable USDC redemption and minting with a new bank as soon as possible. In a later tweet, he said Circle selected Cross River Bank for automated, USDC-related settlements.

Thanks to the government’s bailout on Sunday, Allaire was able to subsequently affirm that USDC reserves were 100% collateralized.

Circle is moving most of its Signature Bank cash to BNY Mellon.

Read more: Hedge fund billionaire Ken Griffin says US should have let SVB die

Criticisms of management and fractional reserves

Data Finnovation criticized Circle’s selection of Cross River Bank, saying its managers have a poor track record of treasury management. It posted a series of regulatory filings showing a mix of mortgages, commercial loans, and consumer finance on Cross River Bank’s balance sheet.

In his tweet thread, Allaire briefly acknowledged the risks of keeping money in a fractional reserve bank. He said he supports the Payment Stablecoin Act, which would require stablecoin issuers to keep cash and short-term treasury bills in a Federal Reserve-chartered bank account. Circle said it keeps 77% of its USDC reserves in treasury bills.

A co-host for the YouTube channel Paul Barron Network said Circle sent a notice that it was suspending USDC redemptions in Brazil, India, Indonesia, Latvia, Mexico, and the Philippines. Circle has not officially announced an end to USDC redemptions in these countries.

On Thursday, SVB customers tried to withdraw $42 billion in deposits while, at the smaller Signature Bank, depositors attempted to withdraw 20% of the entire bank’s assets a day later.

In 2018, Signature attracted attention from regulators when it became one of the few banks willing to do business with crypto companies. By early 2022, digital asset companies accounted for 27% of the bank’s deposits and it served customers including Binance, Coinbase, and Circle.

Read more: USDC faces SEC enforcement amid stablecoin crackdown

Feds backstop the $1 peg of USDC

Fortunately for proponents of the USDC, the US Treasury, Federal Reserve, and FDIC bailed out deposits at two banks holding at least 8% of the backing of USDC. 

The government declared SVB and Signature as systemically important. To alleviate contagion to the US financial system, the FDIC guaranteed all deposits at both banks — including deposits above the FDIC’s standard, $250,000 per customer limit for federal deposit insurance.

USDC issuer Circle has subsequently switched its primary bank to BNY Mellon and is moving its automated settlements to Cross River Bank. It temporarily disabled USDC redemptions and minting amid the transition.

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The post How the US gov’t bailed out USDC stablecoin appeared first on Protos.