Is GUSD safe? Is GUSD FDIC insured?

Is GUSD safe? Is GUSD FDIC insured?

Robert McDougall 

January 9, 2024

Cryptocurrency

The raging storms of volatility in the crypto world have led investors and traders towards stablecoins, which are cryptocurrencies that are pegged to a reliable external asset. In contrast to traditional cryptocurrencies, stablecoins maintain a steady value and negate the fluctuations that are often associated with the crypto market.

We understand that crypto investors today want the best of both worlds; returns and stability. And stablecoins like GUSD offer them just that through dollar-pegged currencies. These stablecoins derive value by holding one USD in reserve for each stablecoin that is issued.

Released in September 2018, the Gemini Dollar, or GUSD, aims to create a transparent connection between Blockchain and traditional finance systems. The Gemini dollar is an ERC-20 token, which can be stored in all digital wallets that accept Ethereum tokens.

In this article, we take a detailed look at whether GUSD is safe and FDIC-insured. FDIC insurance protects depositors from the loss of their deposits and can act as an external layer of protection when it comes to crypto volatility.

Stay with us and read on to find out more about GUSD!

What is GUSD?

GUSD is a crypto stablecoin pegged to the American dollar. As the crypto craze increases, the utility of dollar-pegged cryptocurrencies like GUSD increases. The crypto asset was launched back in 2018 by Gemini, a popular cryptocurrency exchange, and has since become desirable with investors.

GUSD was heavily marketed as a dollar-pegged cryptocurrency, with a U.S. dollar kept for each GUSD in an FDIC-insured bank account. However, there are certain claims regarding the authenticity of these promotions. Something we will discuss in detail later.

The reserves are also audited and examined by private audit firms on a daily basis, ensuring parity between the cryptocurrency and the pegged dollars.

GUSD is an ERC-20 token that is based on the Ethereum blockchain network. The information related to the smart contracts for the cryptocurrency and public nodes is easily available for transparency.

GUSD’s Connection with Gemini Exchange

Since GUSD is directly connected to Gemini Exchange, there are several use cases consumers can benefit from. For starters, you can use your GUSD assets together with the Gemini Pay ecosystem for seamless payments and transfers over the globe. You can also use the exchange to store your assets and earn money by trading them.

How is GUSD Regulated?

Stablecoins are digital assets designed to maintain a stable value relative to a reference asset such as a national currency. Stablecoins like GUSD play a significant role in the current financial system and are expected to play an even bigger part in the future. Due to this significance, the U.S. Federal Reserve has been calling for comprehensive regulatory measures.

Ex-Federal Reserve Governor Lael Brainard signaled that the case for the Federal Reserve to regulate stablecoins pegged to the US dollar is getting stronger over time. However, the regulation of stablecoins highly depends on the legal form of the issuer.

GUSD and Gemini Regulatory Connections

The regulations and legality of GUSD are directly connected to its parent company, Gemini. Gemini, the exchange behind the cryptocurrency GUSD, secured a New York State Charter in the year 2015. By doing so, Gemini became one of the first cryptocurrency exchanges in the United States to get the charter from the New York State Department of Financial Services.

Federal Regulations Pertaining to GUSD

Over the years, Gemini has used a centralized system to protect consumers against security threats and also to give the Gemini dollar some key advantages over its competitors. Currently, Federal regulations bar stablecoins and issuers from violations of the Commodity Exchange Act, including misrepresenting facts regarding FDIC insurance. 

For example, the CFTC settled charges with the companies that created the stablecoin Tether for alleged misrepresentations regarding the reserves backing the stablecoin. The order against the Tether companies required them to pay a $41 million fine and cease and desist from further violations of the CEA.

The same federal regulations also pertain to the GUSD, and there is currently some confusion surrounding the stablecoin's claim of FDIC insurance. We will study that in detail later.

Is GUSD Safe?

The safety and security of GUSD have been a major factor in the stablecoin's rapid progression and growth. The BPM Accounting firm claims Gemini Trust Company LLC had total reserves of $563.570 million in February 2023. The funds are kept safe through a thorough three-layer smart contract security measure:

  1. The Proximity Layer: The first security layer keeps the blockchain behavior and security threats in check. The proximity layer evaluates permissions on the Blockchain and decides which ones to restrict.

  2. The Implicit Layer: The second layer monitors all data carried within the smart contract. The implicit layer also creates and destroys assets to ensure that the GUSD assets circulating in the market are pegged to the available U.S. dollars.

  3. The Storage Layer: The third and final layer of security calculates and ensures storage balances on the public Blockchain.

GUSD Security Measures

Besides the layers mentioned above, GUSD also incorporates other security measures to establish security and safety.

  • Cold Storage: To begin with, Gemini uses cold storage facilities to store all GUSD keys offline. The funds aren't accessible through the Internet.

  • Use of HSMs: Gemini utilizes interactive Hardware Security Modules (HSMs) for creating, storing, and managing all keys and tokens generated on the network.

  • Attack Identification: The Gemini network can identify attacks in time and restrict them before they cause any damage.

  • Multi-Signature Security: GUSD also comes with multi-signature security that requires at least two different signers. Unauthorized hacking attempts are hence restricted.

Past Stability and Attacks

While GUSD has had a stellar past without any issues, the same cannot be said about Gemini Earn, a product resembling a savings account. Earn Investors saved GUSD on the platform for 8% APY, but funds in their accounts were blocked when Genesis — a crypto lender — filed for bankruptcy. The funds aren’t accessible to customers yet. 

Gemini Earn investors and users are still waiting for updates on their frozen funds. 

Is GUSD FDIC Insured?

FDIC insurance protects depositors from the loss of their deposits and can act as an external layer of protection when it comes to crypto volatility. As we have stated earlier in this article, there has been confusion related to Gemini's claims that GUSD is FDIC insured. The promotional materials forwarded by GUSD to clients by email and even on Gemini's exchange mention that funds on the exchange are backed and insured by FDIC.

The reality of GUSD's FDIC Insurance

While Gemini and GUSD have used confusing terminology in promotions, it is clear that the stablecoin isn’t FDIC insured. On its website — in a section called "FDIC Insurance", — Gemini says that GUSD is at least in part backed by dollars that may be held in FDIC “eligible” accounts at three banks: State Street, Signature, and Silvergate. None of the banks have said anything about this.

Todd Philips, a former senior attorney at the FDIC, believes that the marketing promotions used by Gemini are misleading but may not be illegal because nowhere has the stablecoin mentioned complete FDIC insurance. The exchange has just used the term to improve trust through FDIC mention.

Why Is GUSD Not FDIC Insured?

Frighteningly, FDIC insurance may not protect GUSD. To explain, the FDIC only insures bank accounts for up to $250,000. BMD estimates Gemini had $563.57 million in reserves in February 2023. Additionally, the FDIC is currently not insuring stablecoins from the crypto market. The appropriate timeframe on when stablecoins will be insured is yet to come. No stablecoins are currently insured by the FDIC.

Comparative Analysis with Other Stablecoins

Crypto investors are showing interest in stablecoins due to their fiat backing and reduced volatility. While GUSD has grown in reputation, it goes against many other stablecoins as well. We compare the stablecoins in this section: 

USDT

Tether (USDT), on the other hand, is backed 1:1 by the USD but has been surrounded by controversies concerning the actual amount of backing and its transparency levels. Audits are conducted periodically by third-party accounting firms.

Tether Limited and its parent company, iFinex (operator of Bitfinex), manage and issue this coin. USDT's custodians include Deltec Bank & Trust Limited, Bitfinex, and other reputable financial institutions associated with Tether's partners. They put in significant compliance efforts, including AML and KYC procedures, but do not provide specific insurance for USDT tokens.

USDC

USD Coin (USDC) is a regulated coin issued by the Centre, a consortium founded by Circle and Coinbase. Like GUSD and USDT, USDC is pegged 1:1 to the U.S. dollar. The reserves are audited monthly by the independent accounting firm Grant Thornton.

USDC has implemented the AML, KYC, and other U.S. banking regulations. The coin is issued as an ERC-20 token, making it compatible with the Ethereum ecosystem. Circle, a regulated money service business, is the custodian of USDC. Although these compliance attestation reports are openly available, there is no express insurance coverage for USDC.

Comparative Analysis

While GUSD, USDT, and USDC all claim to keep a 1:1 peg with the USD, there are notable variations concerning their regulatory status, auditing practices, and backing. GUSD leads with strict regulation by NYSDFS, indicating advanced compliance with U.S. banking laws.

The table below summarizes the comparison between all stablecoins: 

Feature

GUSD

USDT

USDC

Issuer

Gemini Trust

Tether Limited

Centre Consortium

Backing

USD 1:1

USD 1:1

USD 1:1

Transparency

Regular audits

Limited transparency

Regular audits

Regulatory Compliance

NYDFS regulated

No formal regulation

USDC is regulated by the US government

Verification

KYC/AML required

KYC/AML required

KYC/AML required

Supply

~$4 billion

~$62 billion

~$24 billion

Token Standards

ERC-20, ERC-223

Omni, ERC-20, TRC20

ERC-20, ERC-223

Transaction Speed

Few seconds

Few seconds

Few seconds

Supported Platforms

Various

Various

Various

Fees

Variable

Variable

Variable

Decentralization

Partially centralized

Partially centralized

Partially centralized

Conclusion

GUSD has made a significant impact in the crypto market as an alternative stablecoin to USDT and USDC. While the stablecoin is not insured by the FDIC, there are three layers of security in the Blockchain and numerous others outside of it to protect consumer assets.

In short, we believe GUSD is safe to invest money in and can act as a good alternative to USDT. However, it is always important to do your own thorough research so you can make an informed decision before investing in any stablecoin or cryptocurrency.


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