The New York Department of Financial Services has approved Gemini Trust Company’s request to issue its first cryptocurrency.
Called the Gemini Dollar — which launches today — every token issued using the ethereum blockchain will be backed by a U.S. dollar, designed to give it both the stability of the fiat currency, and the speed and borderless nature of a cryptocurrency.
Unlike bitcoin, ethereum, zcash, and the other cryptocurrencies currently supported by Gemini, the Gemini Dollar is designed to be an exchange of value similar to the U.S. dollar and not a store of value like gold.
But what truly distinguishes the token from other so-called stablecoins that have risen in popularity as innovators seek to minimize the wild price fluctuations of other cryptocurrencies is what Tyler Winklevoss calls the “network of trust” that surrounds the coin.
In addition to the approval from the New York Department of Financial Services (NYDFS), investing giant State Street will be holding onto the U.S. dollars in an FDIC-insured account, and multiple third-party audits will be conducted both before and after the launch.
“It’s not just Gemini Trust,” said Gemini CEO and co-founder Tyler Winklevoss. “But you have to build a network of important players that are also trusted to solve for the trust problem of a stablecoin.”
While the stablecoin concept is designed to offset some of the concerns surrounding frequent and dramatic price fluctuations surrounding more traditional cryptocurrencies, it also introduces new problems.
Unlike most traditional cryptocurrencies that are created through a mining process that also audits the record of transactions stored on the blockchain, a stablecoin is usually created when the fiat currency it is tied to is deposited into an account.
To that purpose, Boston-based State Street is accepting cash deposits for a cryptocurrency firm, for what appears to be the first time. A State Street representative declined to comment on the matter. Going forward, additional third-party audits of the Gemini account will be performed each month by BPM audit to ensure that there is a U.S. dollar for every Gemini Dollar in existence.
While State Street is not taking custody of the cryptocurrency itself, Winklevoss says his team of 150 employees worked closely with the bank for over a year to secure the account for cash deposits. “There’s a lot of enhanced due diligence and on-boarding and kicking the tires that goes into that,” said Winklevoss.
The Gemini cryptocurrency exchange is now the 54th largest in the world, with a total of $12 million volume over the past 24 hours, according to CoinMarketCap data. Also announced today, Paxos, the parent company behind the 50th largest exchange in the world itBit also received regulatory approval for a similar U.S. dollar-backed stablecoin issued on the ethereum blockchain.
NYDFS superintendent Maria T. Vullo says the dual approvals are subject to ongoing regulatory supervision and will include requirements that the exchanges can ensure the tokens aren’t used to launder money or manipulate market prices. “These approvals demonstrate that companies can create change and strong standards of compliance within a strong state regulatory framework,” said Vullo in a statement.
While neither Tyler nor his brother Cameron would disclose whether or not they have any customers lined up to actually buy the tokens, they described potential customers as any decentralized application, or dapp, built on the ethereum blockchain, individual traders, and institutions who want to move value.
To facilitate the movement of that value Gemini Dollars are redeemed or destroyed at the time of deposit into the Gemini platform and will comply with the ERC-20 token standard, according to a confidential copy of the Gemini whitepaper viewed by Forbes, making them more easily interoperable with other compliant tokens. The total ethereum market value is now $11 billion.
As an example of how this might improve current shortcomings in the way fiat currency is traded Winklevoss said that “if there’s a price dislocation in a certain market and it’s a Friday night traders can’t move fiat currency until Monday.” But the Gemini Dollar links “the 24-7/365 nature of cryptocurrency and blockchain with the fiat world.”
In a sense, the stablecoins are really nothing more than code that executes certain tasks that tie the U.S. dollar to an encrypted token similar to bitcoin in a reliable, transparent way. To help ensure that code, called a smart contract, is as free from bugs as possible, Gemini contracted with third-party audit firm Trail of Bits.
The New York-based security firm is best known for auditing the Parity code after flaws were discovered in its etherum wallet, now serves as the chair of the Enterprise Ethereum Alliance’s security task force, and committed two engineers to work for two months to analyze the Gemini code.
While the final results of the audit have yet to be released, the co-founder and CEO of Trail of Bits, Dan Guido, confirmed to Forbes that his firm initially identified two high security issues, two medium security issues and four low security issues, each of which were resolved by the Gemini team as they were identified. “At the end of the engagement every issue we had identified was sufficiently resolved,” Guido said.
Now that the stablecoin is launched, Winklevoss hopes it will help fulfill the original promise of cryptocurrency to buy and sell everyday goods and services. In the early days of bitcoin, a proliferation of enterprises including Overstock.com and Microsoft accepted the cryptocurrency as payment, along with a number of online marketplaces set up specifically for the purpose.
But as bitcoin rose in value to as high as $20,000 and to its current price of $6,301, investors stopped spending the cryptocurrency and started holding it as a longer-term investment. Ethereum is currently trading for $197 according to CoinMarketCap data.
To meet the resulting demand for a cryptocurrency form of payment a number of competitors have recently entered the space. In addition to Gemini and Paxos, VC firm Andreessen Horowitz earlier this year backed stablecoin startup Basis and PayPay co-founder Peter Thiel backed Reserve, another stablecoin project. Computing giant IBM has identified stablecoins as a possible product of interest to market to central banks looking to leverage blockchain benefits while still controlling monetary supply.
“You don’t generally spend gold to buy something. You don’t generally spend a share of Apple to buy something,” said Winklevoss. “You convert them into a fiat currency. So we want to bring a fiat currency onto the blockchain that can be used as an effective medium of exchange for payments.”