A lot has been heard and said about Gemini’s recently unveiled stablecoin Gemini dollar (GUSD) ever since it was launched. While Winklevoss twins are projecting their stablecoin project as an effort that will help in regularizing cryptocurrencies as a mainstream asset class, decentralization hardliners are not so convinced of it. They feel that GUSD is a tool that can put unprecedented power in the hands of Winklevoss brothers. One researcher who believes in this theory recently analyzed the code of GUSD smart contract and published his findings on Good Audience. And what he published is an eye-opener.
Alex Lebed, the researcher who reviewed the code of GUSD, clarified in full disclosure that he is associated with another stablecoin project. But that doesn’t mean what he published is a lie. According to him, the GUSD smart contract code includes a provision that allows its custodian (namely Gemini crypto exchange) to freeze any account. Plus, it uses an ERC20Proxy contract that allows Gemini to upgrade the contract once every 48 hrs. This second thing allows Gemini to render all tokens non-transferable at any point of time.
Regulation requires central oversight
The ability to freeze funds at any time is not surprising because Winklevosses have proudly been promoting GUSD as “first trusted and regulated digital representation of dollar”. That regulation comes from New York Department of Financial Services (NYDFS), which created the controversial BitLicense regulatory framework. Gemini holds an NYDFS charter, and therefore it must submit to the stringent regulatory requirements of NYDFS. Not only it needs to keep GUSD fully backed by US dollar reserves, it also needs to prevent the use of GUSD in any kind of misconduct. The requirements of NYDFS say in this regard:
“The firms must prevent and respond to any potential or actual wrongful use of stablecoin, including but not limited to its use in illegal activity, market manipulation, or other similar misconduct. Additionally, they should also implement, monitor and update effective risk-based controls and appropriate BSA/AML and OFAC controls to prevent the Gemini Dollar or Paxos Standard Token from being used in connection with money laundering or terrorist financing.”
All these things require some central oversight to be implemented, so the control element is not unique to GUSD. It’s inherent in other stablecoin projects as well. Tether, for example, was able to release an emergency fork last year when its treasury address was hacked by someone. In doing that company blacklisted Tether tokens worth more than $30 million and prevented the hackers from spending them. Now, technically the node operators were free to not follow the fork. However, USDT’s underlying assets (namely US dollar reserves) can be redeemed from Tether organization only. So if node operators would have refused to follow the fork, Tether would’ve rendered their tokens useless by refusing to honor the tokens on original chain.
In a nutshell, the entire thesis of stablecoins is actually a corrupt bargain. It’s not fair to blame Gemini for something that others are also doing. We can also find some solace in the fact that at least regulators like NYDFS won’t allow the firms behind these stablecoins to arbitrarily freeze the funds according to their whims and fancies.