Gemini, the bitcoin exchange founded by the Winklevoss twins, is gatecrashing a red-hot corner of the cryptocurrency market with a new stable coin, the company launched Monday.
The so-called Gemini dollar would be pegged to the US dollar, with each token backed by a US dollar in a reserve of cash held by State Street, the Wall Street custody bank. The firm is hoping the new coin, which is based on Ethereum’s network, will serve as a new type of digital cash that can be used in stores by customers.
The project, which is over a year in the making, addresses “a trust problem” common among other stable coins, according to its white paper.
Gemini says oversight from financial regulators, specifically the New York Department of Financial Services, will lend its crypto more credibility than its competitors. The crypto is also subject to New York Banking Law, according to the exchange operator.
Already, it was assessed by the information security company Trail of Bits over the course of eight weeks. Gemini, according to documents reviewed by Business Insider, fixed all the issues discovered by the audit.
The Gemini dollar would go head-to-head with Tether, the controversial firm behind the stable coin USDT, which has dominated the market for stable coins. Skeptics have questioned whether Tether actually has the dollars it says to back its crypto.
And some market participants have linked the crypto to market manipulation. For instance, academics at the University of Texas published a paper accusing Tether of being used last year to manipulate the price of bitcoin, propping up its run to $20,000 in December.
Still, trades between USDT and bitcoin have become more common this year, Morgan Stanley found. The bank, which compiled data from more than 350 exchanges, estimates 14.2% of bitcoin trades are paired against USDT, up from less than 1% in October.
Across the crypto space, projects are attempting to step on Tether’s turf, including TrueUSD and MakerDAO. Paxos, a blockchain company, also got the greenlight from the New York Department of Financial Services Monday to launch its stable coin, Paxos Standard.
The Gemini dollar will ultimately trade on numerous exchanges, according to a spokeswoman.
Business Insider spoke with Tyler Winklevoss, Gemini’s cofounder and president, about the project and related cryptocurrency topics.
Business Insider:Walk me through the evolution of this project. What’s the idea behind it, and how did it come to fruition?
Tyler Winklevoss:We have been thinking about the stable-coin idea for over a year now. The thing that is attractive about the concept is that is does something different than any other digital asset. When we think about the first-ever digital asset, bitcoin, which is a virtual commodity, it took years for the market to sort out the broad understanding of what bitcoin is. The legal precedent and the use case is definitely coming down as virtual commodity. And ether is the same. Those are very cool use cases. Ether as a digital oil. And bitcoin as a digital gold. The idea of a digital commodity is there and well understood.
And then we had the intro of securities on the blockchain, normally referred to as ICOs, representing a share in a company or project. Being in this space over the years it has been really cool to see the development of both virtual securities and virtual commodities.
But when something is a store of value, you generally don’t want to spend it. We use the word digital currency as an umbrella term in this space, and early on this term was used, but not many of these digital assets behave like currencies. And it makes sense. You don’t buy things with your gold or with your shares of Apple. Similarly it doesn’t make sense to do that with an ICO or bitcoin. A stable coin is different and necessary for the ecosystem as that medium of exchange.
BI:What problems does Gemini dollar try to tackle?
Winklevoss:We saw two problems we wanted to address when we thought about how we could build a viable stable coin. The first was the technical implementation. A computer-science problem. Making sure you have the smart contracts, picking the right network. Ether was a good network obviously because of the human capital around it, the level of adoption, its track record. And building the engineering of a viable stable coin. That’s where Gemini’s strong team comes in.
Then there’s trust. Whether we print too many or too much, we need to make sure it corresponds with the fiat dollars in a bank account. As a trust company, we are regulated by the state of New York, but the trust problem doesn’t start or stop there. It is about building a network of trust among all participants in the ecosystem. Multiple eyes are looking over it.
Getting on an auditor is not a trivial task. They have to be comfortable with you as a business. That was another interesting but good challenge. And getting ready for approval takes a long time.
[Editor’s note: Gemini’s US dollar balance held at State Street will be audited by an independent accounting firm on a monthly basis, according to a news release.]
BI:Stable coins such as Tether have been a darling among trading shops that can use them to quickly transfer their coins out of the volatile markets of bitcoin and other cryptos without having to engage with the slow fiat off-ramps. Have you been speaking with those market participants about Gemini dollar, and what is their impression?
Winklevoss:We obviously talk to all of our clients, retail, prop shops, market-making firms, trading firms — sometimes one firm can do all of those things and more. There is a lot of demand there. We thought a stable coin was important for the ecosystem. But we also have seen a lot of demand from those clients. And so basically bringing USD onto the blockchain is key here. Linking the traditional financial network with the world of crypto in the way that includes all the good utilities of money, giving them all the positives things of crypto. The obvious use case for a trader is arbitrage or being able to move capital around in an efficient matter.
It is not just demand coming from traders. I think that dollars on the blockchain is a really important and crucial component. We do think that a good stable coin is a really important catalyst to adoption. Because there is a reason why fiat lives side-by-side with stocks, bonds, and precious metals. They don’t cannibalize each other because they fulfill different use cases.
There is a use case of being able to accept dollars for decentralized applications. They can accept bitcoin and ether. But if you are creating a decentralized Uber, people aren’t going to want to pay with an asset that most of us believe could go up 10 or 20 times in the future.
BI:Across the market, I’ve noticed bitcoin exchanges entering businesses outside of trading, including custody or venture and now in your case the stable-coin business. Do you view the role of exchanges in crypto as being more than just facilitating trading in order to help shepherd the market to the next level?
Winklevoss:I think that a lot of us, and especially the good actors, are definitely proactively doing things we don’t have to do. Or aren’t required to do. But it is a long-term approach. This is something we have to do to push the ecosystem forward. And we want to see the market continue to mature. Wall Street is aware of digital assets it isn’t really in cryptocurrencies today the way it can be in the future.
If we want compliance departments at banks to get comfortable, then we have to speak their language. Whether that means the right internal controls, or a SOC2 designation, than that is what it means.
The big point is market surveillance. The Virtual Commodity Association we are obviously going to be a member in pushes the ball forward. All of those things are going to help mature the market. And it’s also just time as well. You can’t build markets and trust overnight. It is so young and so early. But also a lot has changed in a short amount of time. A couple years ago the conversations were so different. And even a year ago, there’s been tremendous change.
BI:In order to get Gemini dollars to become digital cash, one would think big merchants would have to come on board. Is Gemini talking with merchants like Starbucks to accept the stable coin at their stores?
Winklevoss:That’s a great point. There was a time in this world when people didn’t know if bitcoin would kill fiat or the financial system or both. And some people tried to live off bitcoin for a month. As it turns out people generally don’t believe bitcoin will be used to buy Starbucks or a Happy Meal. The question is actually does it disrupt gold or exist side-by-side precious metals in a portfolio? The beauty of a stable coin is you don’t need to worry about spending it. And groups don’t need our permission to use it. Starbucks could accept it if they wanted to. And we will be open to those conversations.