First Digital USD or FDUSD stablecoin is issued by a Hong Kong-based financial firm subsidiary, First Digital Limited.
Understanding the Stablecoins
We are all familiar with the volatile nature of the cryptocurrencies by now. Every crypto token, from the ones that are recently released up to Bitcoin, has shown volatility on several occasions, depending on various factors like regulatory uncertainties, supply and demand dynamics, investor sentiment, FUD or FOMO, correlation with the stock market, etc.
Whatever the cause of volatility, the fact is that this uncertainty has proved to be a great hindrance to the overall adoption of the crypto industry.
Due to these reasons, stablecoins were introduced in the crypto landscape to address the challenges created by volatility by aiming to maintain a stable price peg to traditional assets. The asset in question is usually the U.S. dollar.
The stability of the stablecoins makes them suitable for everyday transactions and financial activities compared to their highly fluctuating counterparts. If you are wondering why we need stablecoins if their value sticks close to 1 USD, then there is a good reason.
Despite aiming for a fixed value, stablecoins are crucial alongside volatile crypto assets like Bitcoin and Ethereum.
They act as a haven within the crypto world, allowing users to store funds or transact without wild price swings. The stability makes them ideal for everyday payments, hedging against volatility, and fueling Decentralized Finance (DeFi) applications.
By providing predictable value and bridging the gap with traditional finance, stablecoins enable wider crypto adoption and unlock innovative financial products and experimentation within this evolving ecosystem.
How do stablecoins maintain a peg to USD?
Stablecoins operate through various mechanisms to achieve this stability. Fiat-backed stablecoins maintain reserves of traditional assets like USD to support their value directly.
Crypto-backed stablecoins achieve stability through algorithms that adjust their circulating supply based on demand. Algorithmic stablecoins utilize smart contracts and economic incentives to manage their price peg without relying on external assets.
First Digital (FDUSD)
The First Digital (FDUSD) is a stablecoin introduced in June 2023 by First Digital Limited. First Digital Limited is a Hong Kong-based company that provides services like safely storing crypto and other digital assets, helping navigate complex regulations, and converting between digital and traditional currencies.
They also offer tools for businesses to build their digital asset products and services, aiming to connect traditional finance with the world of digital assets seamlessly. The company has stated that its intention for FDUSD is to be backed by one U.S. dollar or any asset equivalent to the value held in reserves with its appointed custodian, First Digital Trust Limited.
The company has expressed that it fully complies with the existing financial regulations set under Hong Kong law and is mandated to keep all the FDUSD reserves safely in segregated accounts.
Segregated accounts refer to accounts where a financial institution or company holds assets separate from its operational funds or assets. These segregated accounts are maintained to ensure that the assets belonging to clients or customers are kept distinct and secure from the company’s assets.
It means that the segregated accounts are separate from the company’s funds and are specifically designated to hold the FDUSD stablecoin reserves. The segregation helps to protect the stability and integrity of the FDUSD reserves, reducing the risk of misappropriation or misuse by the company.
The practice also enhances investors’ confidence because they know that their funds won’t be subjected to any misuse by the company, and its stability will also be maintained.
Lastly, the firm behind the FDUSD stablecoin also stated that they must hold reserves in cash or readily convertible assets, per regulations. According to the company, the practice helps guarantee an equal value of assets backing each unit of the FDUSD stablecoin. In other words, it ensures the 1:1 backing of the stablecoin.
The issuer of FDUSD releases a report called the “attestation of reserve,” which is examined by independent auditors.
The report demonstrates that the amount of FDUSD in circulation is backed by an equal cash value or efficiently convertible assets held securely.
Initially launched on the Ethereum and BNB Chain networks, FDUSD stablecoin intends to expand its availability to other blockchain networks.
FDUSD stablecoin and Binance
Last year, during Binance’s legal trouble with the regulatory authorities, the one setback the exchange faced was that it was forced to discontinue the support for its BUSD stablecoin.
The firm informed its customers that it will stop supporting the BUSD stablecoin by December 15, 2023, following legal scrutiny from the SEC. The United States Securities and Exchange Commission laid objections against the issuance of BUSD as a registered security.
Paxos, the issuer of BUSD, faced a Wells Notice from the New York Department of Financial Services, after which it was forced to halt new BUSD issuance.
At the time when Binance made the announcement, $16 billion worth of BUSD tokens were still circulating in the market. That amount has shrunken dramatically in just three months, and currently, the total market capitalization of BUSD has shrunken to just $84.6 million (at the time of writing).
In the same announcement, Binance, the largest cryptocurrency exchange in the world, asked its users to convert their remaining BUSD tokens into FDUSD tokens. The exchange also said that it would replace the remaining BUSD with FDUSD after the deadline for the conversion passed, which was set for December 31, 2023.
The good thing for the customers in this scenario was that the exchange didn’t charge any conversion fee, allowing users to swap to FDUSD without the trepidation of paying an extra cost. According to CoinMarketCap, the current market capitalization of FDUSD stablecoin stands at $2.84 billion (at the time of writing).
The current market capitalization of this stablecoin places it at number 4, behind USDT, USDC, and DAI. USDT is the number one stablecoin in the world, with the current market capitalization of $97.6 billion, while USDC stands at $28.08 billion. The current market capitalization of DAI is $5.34 billion.
Interestingly, DAI is the only algorithmically backed among the four stablecoins mentioned here. Unlike other stablecoins backed by fiat currencies or assets held in reserve, DAI maintains its stability through smart contracts and decentralized mechanisms on the Ethereum blockchain.
Benefits of FDUSD
Now that we know what FDUSD exactly is and that it has some significant competition in the digital currency space, we will look at what advantages can the holders of FDUSD extract from this stablecoin:
Transparency
The parent company behind the FDUSD stablecoin has announced that it will comply with the existing crypto regulations to avoid any regulatory backlash from relevant authorities. The firm has also said that it will allow any audit of its books to ensure it is in full compliance. The company’s willingness to show such a level of transparency will boost the investors’ confidence, and they will feel less hesitation towards investing in this stablecoin when they know that the firm will not misuse their investment for their benefit.
Multiple Use cases
The newcomer in the world of stablecoin is not here to give you an alternate option to other stablecoins. FDUSD can serve multiple purposes, which makes the stablecoin more versatile.
It can be used for fast and efficient cross-border transactions, which provides users who want to send remittances an excellent opportunity to perform the task efficiently and with less expenditure.
The other benefit of using stablecoins like FDUSD for cross-border transactions is that unlike traditional banking, which requires a lot of time and intermediaries to ensure that the transaction passes through, FDUSD can accomplish the task for you with lower transaction fees and in less time.
Like other stablecoins, FDUSD can be used on various DeFi platforms. People can participate in yield farming, lending, borrowing, and staking, taking advantage of its flexibility within different DeFi systems.
Hedge against Volatility
Given the fluctuations in cryptocurrency markets, FDUSD stablecoin is a valuable tool for hedging and maintaining stability when prices are highly volatile. Investors can exchange other cryptocurrencies for stablecoins like FDUSD, allowing them to secure profits or safeguard their investments against drastic market shifts while keeping their footprint in the crypto market.
The option to convert cryptocurrencies for stablecoins allows traders and investors to maneuver back into the market when the conditions turn ideal for them, increasing their utility and popularity. Since you know that the value of stablecoins like FDUSD is pegged to the U.S. dollar, you are not at risk of suffering market volatility in your financial portfolio if you have converted them to stablecoins like FDUSD.
Risks of FDUSD
We have highlighted the benefits of converting your crypto assets into stablecoins to minimize the risks of market volatility while still retaining exposure to the crypto market. Some risks and challenges are associated with them that cannot be ignored, and you should be aware of them before adjusting your financial portfolio.
Risks of Depegging
The stability of FDUSD relies on its reserves being able to back the redemption of FDUSD at its face value whenever redemption is requested.
Thus, the safety and liquidity of these reserve assets are crucial for maintaining FDUSD’s stability. A third party holds FDUSD’s reserves in custody, and these assets can range from easily tradable to less liquid holdings.
There are inherent risks associated with the issuer’s ability to uphold the claimed features of FDUSD, including its stated value and timely redemption at face value.
We will refer to an incident about how a stablecoin can lose its 1:1 peg to the U.S. dollar.
In 2018, Tether, the largest stablecoin in the world in terms of market capitalization, lost its peg to the U.S. dollar because of rumors circulating in the market that the company didn’t hold as many assets as they claimed, which was the basis on which USDT maintained its peg to USD.
Also, rumors of internal conflicts within the firm spread across the market, which didn’t boost investors’ confidence. USDT went as low as 94 cents before it was recovered.
In incidents like these, the market can panic if the price doesn’t stabilize soon, and investors can trigger a massive sell-off to minimize their losses, which can cause a market-wide panic, causing the market to take an enormous fall.
Regulatory Risks
The regulatory environment surrounding cryptocurrencies constantly evolves, and stablecoins like FDUSD are not immune to this scrutiny.
The main point of contention is that laws regarding crypto, in general, vary from jurisdiction to jurisdiction, and this regulatory uncertainty doesn’t bode well for the stability of the overall market.
You must know that this regulatory scrutiny caused the BUSD stablecoin issuer Paxos to stop minting new BUSD tokens and supporting the existing BUSD tokens and the Binance crypto exchange.
Due to this incident, FDUSD stablecoin exploded onto the map of the stablecoin world since Binance publicly informed its users to swap their BUSDs for FDUSDs.
The exchange also announced that these swaps would be made automatically after the deadline. The incident shows that you need to follow the regulations in different jurisdictions to avoid such incidents.
Operational and Counterparty Risks
FDUSD faces operational risks, including fraud and cyber threats, due to its reliance on third-party services like exchanges and custody providers. These services are susceptible to various operating vulnerabilities. Additionally, there are limited avenues for getting any reimbursement in case of loss or theft of crypto assets, which exposes holders of cryptocurrencies to more risks.
The operation of FDUSD involves financial intermediaries, introducing counterparty risks for users. This reliance on intermediaries such as exchanges, market makers, banks, and money transmitters can result in delays in redemptions and increased costs. Users may need help if stablecoin issuers depend on these entities to facilitate redemption.
Final Thoughts
In conclusion, FDUSD stablecoin emerges as a promising addition to the stablecoin landscape, offering stability, transparency, and versatility to users within the crypto sphere.
As with any investment, individuals must conduct thorough research and due diligence before diving into the volatile world of cryptocurrencies.
While FDUSD presents opportunities for cross-border transactions, DeFi participation, and hedging against market volatility, it’s essential to remain vigilant and stay informed about regulatory developments and operational risks.
Investors can confidently navigate the crypto market and make informed decisions about their financial portfolios by exercising caution and staying informed.
