Stablecoins Are No Longer Stable, What Happened To FDUSD?

[TL；DR]:

Recently, Justin Sun accused First Digital Trust of bankruptcy, causing its US dollar stablecoin FDUSD to temporarily decouple to $0.8799. Later, it rebounded to above $0.9980 due to the official statement that redemption was stable.

As the core stablecoin of a well-known exchange eco, the rise of FDUSD is closely related to its strategic support.

The FDUSD depegging incident revealed problems such as insufficient transparency of stablecoins, regulatory loopholes and fragile market confidence.

Introduction

Whenever the market falls into a bearish panic, the stablecoin track will always face a depegging crisis, just like when Terra (UST) experienced a death spiral collapse during the last round of bull and bear cycles. Recently, when the market was weak and fragile, Justin Sun accused First Digital Trust of being insolvent and causing FDUSD to depegging by 20% instantly, which made the market’s already sensitive nerves tense again.

Panoramic Record of FDUSD Depegging Event

“First Digital Trust is actually bankrupt!” At 22:17 on April 2, Justin Sun posted this tweet on the X platform, which instantly detonated the stablecoin market like a depth charge.

Source: @justinsuntron

The price of the FDUSD/USDT trading pair quickly fell on major exchanges, with Gate.io showing a minimum decline of 0.8799 USDT, a drop of 12%. During this period, the algorithmic trading of market maker Wintermute detected abnormal fluctuations and automatically triggered a $120 million sell order to protect its position.

Source: Gate.io

Justin Sun’s accusation is not groundless. The fuse of this storm can be traced back to three weeks ago. On March 14, the Techteryx v. Aria Commodities case documents disclosed by the Hong Kong court showed that the $456 million reserve held by the TUSD operator through First Digital Trust was illegally transferred to the Dubai entity Aria DMCC. Although Justin Sun originally provided an emergency loan to Techteryx in his personal name to fill the gap, the market nerves have become highly sensitive - after all, just half a year ago, TUSD, which also belongs to the TrueCoin , reached a $500,000 settlement with the SEC due to “misappropriation of reserve funds.” When panic spread to FDUSD, First Digital Trust quickly issued a statement firmly denying the bankruptcy rumors, emphasizing that its FDUSD with a market value of $2.5 billion is fully backed by US Treasury bonds 1:1, and disclosed the International Securities Identification Number (ISIN) of the reserve to show transparency.

Meanwhile, a large exchange, as the biggest supporter of FDUSD, also released good news through unofficial channels. A member, SiSi, said in a user group: “FDUSD can be accepted at a 1:1 ratio.” This statement was officially announced in the early morning of the next day and quickly spread in the community, stabilizing the confidence of some investors.

Source: @FirstDigitalHQ

At 7:00 a.m. on April 3, the platform announced the audit details of Prescient Assurance, emphasizing that FDUSD reserves include U.S. Treasury bonds and overnight deposits, and promised to release a March update report within two weeks. After the news came out, the price of FDUSD rebounded from $0.98 to $0.995 within two hours, but the redemption pressure of $60 million has caused a permanent discount.

Fame Brings Trouble: FDUSD from Hong Kong Label to Regulatory Arbitrage

The root of the FDUSD crisis can be traced back to the dispute between FDT and Justin Sun five years ago. FDUSD is issued by First Digital Trust Limited (FDT), a trust company registered in Hong Kong. It is positioned as a digital asset pegged to the US dollar at a 1:1 ratio, and its reserves are backed by cash or US Treasury bonds. Its parent company, First Digital Group, can trace its history back to Legacy Trust, which was established in 1992. Its clients include traditional capital such as Li Ka-shing’s family office. This cross-border background has quickly made FDUSD popular among institutions.

Source: CoinDesk

In 2019, FDT was spun off from Legacy Trust as an independent entity and completed a $20 million financing round in May 2022. Investors included Telegram’s early investor Nogle and Hong Kong-based venture capital firm Kenetic Capital.

In 2020, FDT took over the management of the reserves of the stablecoin TUSD. According to court documents, FDT transferred $456 million in reserves from the Aria Fund in the Cayman Islands to the Aria DMCC entity in Dubai between 2022 and 2023, whose actual controller is related to FDT utives. Where did the funds eventually go? The indictment shows that $15 million of the funds were used to issue illegal loans to FDT utives, and the rest of the funds were suspected to be invested in high-risk manufacturing plants and mining projects.

Justin Sun’s involvement began in 2022. At that time, Techteryx (TUSD issuer) demanded funds from FDT due to failed redemption. Aria’s refusal to redeem led to a shortage of TUSD. Justin Sun then provided an emergency loan in his personal name to fill the gap, but the relevant funds have not been repaid to date. This debt eventually became the fuse for Justin Sun to attack FDT.

Source: ethersan.io

In June 2023, FDUSD was officially launched, just as Hong Kong launched a licensing for virtual asset service providers. This coincidence gave FDUSD a strong “Hong Kong label “ Due to its deep binding with a large exchange, about 94% (about $2.35 billion) of the total market value of $2.5 billion is held by it. This highly concentrated dependence has made FDUSD leap from obscurity to a leading player in the stablecoin market.

Why Are Stablecoins Neither Stable Nor Transparent?

In my opinion, the “stability” of stablecoins has never relied solely on asset reserves, but more on transparency and information parity.

As far as the public information available so far is concerned, although FDT has disclosed its ISIN number, it has not disclosed its asset composition and liquidity status in detail, making it difficult for the outside world to verify its true solvency. In this context, Justin Sun’s statement of “insolvent” can trigger panic selling, which shows how fragile the trust foundation of investors in FDT is under the impact of information asymmetry and external narratives.

Source: @FirstDigitalHQ

On a deeper level, the FDUSD incident also exposed a regulatory vacuum. Hong Kong Legislative Council member Wu Jiezhuang pointed out that the FDT incident highlighted the lack of supervision of trust companies in the Web3 field and suggested that “trust” be included in legal supervision. This reveals the regulatory dilemma of offshore financial centers: the current “Anti-Money Laundering Ordinance” only requires virtual asset service providers to be licensed, but lacks detailed rules on asset isolation and investment scope of stablecoin custodians.

What is more worthy of vigilance is cross-border regulatory arbitrage. Aria DMCC’s trade financing business in Dubai happens to be in the gray area of ​​UAE financial regulation. When the $456 million reserve was invested in physical projects such as Indonesian nickel mines and Vietnamese ports, it not only circumvented the US OFAC sanctions list review, but also bypassed Hong Kong’s virtual asset custody rules. This “compliance depression” strategy is a typical path for the global flow of crypto capital.

As of the date of writing, the price of FDUSD has rebounded to $0.9982, and the market seems to have returned to calm. But many suspicious details represented by FDUSD have not yet been finalized, and the transparency, stability, and security of the stablecoin track are still worthy of attention. In the future, whether FDUSD can get rid of its over-reliance on Binance and rebuild investor confidence may not only be its own challenge, but also a proposition for the entire stablecoin market.