In-depth: The latest asset risk assessment analysis of the stablecoin TrueUSD (TUSD)

Author: LLAMARISK Compiler: Block unicorn

Relationship with Curve

TrueUSD (TUSD) plays an important role in crvUSD as one of the Pegkeeper pools (crvUSD/TUSD), along with USDC, USDT and USDP. Pegkeepers algorithmically control crvUSD to a $1 peg by minting or burning crvUSD tokens based on market conditions, essentially backing the outstanding crvUSD supply with a portion of their Pegkeeper pair.

Pegkeeper enforces balance in each Pegkeeper pool, so if the peg value of the Pegkeeper asset is less than $1, it will cause too much crvUSD to enter circulation, causing crvUSD to unpegg. Curve intends to launch an improved version of Pegkeeper that will check the token price in combination with other tokens. This will provide better protection by preventing crvUSD deposits from entering the unanchored Pegkeeper pool. Currently, the stability of crvUSD depends on strong confidence that its Pegkeeper pairing is solid and that the stablecoin is low-risk.

In the context of the Pegkeeper asset being crvUSD, there are some criticisms of TUSD's transparency policy that are worth highlighting. TUSD lacks transparency in many ways, including escrow partners, reserve management, validation, on-chain operations, and ownership structure. This report will cover the most worrisome issues surrounding the state of TUSD reserves and should inform DAO voters to determine whether action is required to limit crvUSD's exposure to TUSD.

TUSD Introduction

issuer and custodian

At a high level, TUSD is a custodial stablecoin backed by fiat currency. TUSD is designed to maintain a 1:1 peg to the U.S. dollar, providing stability in volatile crypto markets. The original issuer of TUSD was TrueCoin, LLC (a subsidiary of Archblock, Inc.), but ownership was transferred to Techteryx on December 15, 2020.

According to the description of the TUSD representative, Techteryx is known as an Asian head office with operations in Hong Kong, Singapore, Guangzhou, Shenzhen, Beijing and other places, involving traditional real estate, entertainment, environment and information technology industries.

However, unlike its self-proclaimed Asian parent company, Techteryx Ltd. appears on the BVI (British Virgin Islands) Financial Services Commission's registration list. Little public information is available about Techteryx, prompting speculation about its subsidiaries and ultimate beneficial ownership of TUSD.

As of July 13, 2023, Techteryx has fully assumed the management of all offshore operations and services related to TUSD, including minting, redemption, customer registration, compliance, and oversight of banking and fiduciary relationships.

TUSD has three custody partners, which are described in the audit report as Hong Kong depository, Swiss depository, and Bahamas depository (audit report can be downloaded from tusd.io).

Reserve mix not specifically disclosed but described as: U.S. dollar cash, cash equivalents, and short-term, highly liquid investments of sufficient credit quality that can be easily converted into known amounts of cash. The Hong Kong depository also invests in other instruments to generate income and, in all cases, cash equivalents and recorded costs of other instruments.

The main source of income for TUSD is the interest earned on fiat reserves held as collateral. The income generated from these activities helps cover the operational costs of maintaining the stablecoin infrastructure, the cost of complying with regulations, and supports the growth and development of TUSD. develop.

MINTING/REDEEMING PROCESS

The system architecture of TUSD is as follows:

Users who wish to mint TUSD must have an account and undergo KYC/AML checks. The user then wires USD to a nominated bank account managed by an escrow partner. Techteryx emphasizes that fund management is entirely done by its custodian and that the issuer has never had the authority to handle user funds.

TUSD has real-time access through cooperation with The Network Firm LLP and Chainlink Proof of Reserve (PoR). TUSD can only be minted if the total TUSD supply + newly minted TUSD is less than Chainlink's reported reserves (provided by The Network Firm). Deposits confirmed by the minting check are then tokenized and the corresponding amount of TUSD issued to the user's designated receiving wallet.

Instead, when a user wishes to exchange their TUSD for USD, they first pass KYC/AML checks and specify their Ethereum and bank wire addresses, initiating the redemption process with the stablecoin issuer. TUSD tokens are burned by sending them to the TUSD smart contract, and the corresponding amount of USD will be transferred back to the user's bank account.

March 2023, expansion of TUSD

Until March 2023, TUSD is a smaller stablecoin with limited trading activity, accounting for less than 1% of the overall stablecoin market share. However, Binance decided to make TUSD the successor of BUSD, and subsequently promoted the BTC-TUSD trading pair with zero transaction fees, which significantly boosted its visibility and trading volume, and its market share in just a few months It quickly expanded from less than 1% to 19%.

Suddenly, two large transactions worth US$1 billion each came from the same address and were sent directly to the Binance exchange. These events occurred on March 12 and June 16 respectively (data dates in the figure below: June 27).

TUSD’s meteoric rise may be related to Binance’s zero-fee trading promotion and general promotion of TUSD on the exchange, which Binance announced on June 21. Observers may also have noticed that TUSD's unusual growth trend coincided with the period before the closure of its Prime Trust custody partner in mid-June.

Binance switched to supporting the TUSD stablecoin after the New York Department of Financial Services (NYDFS) ordered BUSD issuer Paxos to stop issuing its BUSD stablecoin. That’s because Paxos’ regulatory issues with Binance-issued BUSD have yet to be resolved. Binance’s move appears to be an attempt to maintain market share in the stablecoin space and reduce reliance on a single stablecoin. The move to boost TUSD resulted in Binance becoming the largest holder of TUSD. It’s worth noting that most of TUSD’s trading volume is currently concentrated in Binance’s BTC-TUSD trading pair.

Token Allocation

According to data from Nansen on July 19, most of the supply of TUSD is stored in centralized exchanges (CEX), and 94% of the token supply is related to CEX addresses. As you can see below, the vast majority of TUSD is actually stored on Binance.

As of writing, the vast majority of TUSD’s token supply is held in TRON (73.56%), worth approximately $2.035 billion. TUSD’s official website advertises its use on TRON, Ethereum, Avalanche, Binance BNB Beacon Chain (BNB) and Binance BNB Smart Chain (BSC), and it compiles the token supply on these chains into its certification report (The picture below is the data from DeFiLlama on July 19).

Distribution - TUSD on TRON

On TRON, the vast majority of TUSD is held by Binance (94.7%), and a small amount is stored in DeFi lending platforms JustLend (3.5%) and Gate.io (1.2%).

Distribution - TUSD on Ethereum

On Ethereum, the distribution of TUSD token holders is heavily skewed towards Binance, which holds 83.53% of the total tokens. Curve, OKX, and Aave have smaller shares at 1.12%, 0.73%, and 0.60%, respectively. Curve's crvUSD/TUSD Pegkeeper pool contains the most TUSD tokens of any contract on Ethereum.

crvUSD Pegkeeper and Decoupling Risk

1. TUSD/crvUSD pool contract

2. TUSD Pegkeeper contract

3. AggregatorStablePrice contract

Pegkeeper supplies and withdraws crvUSD to the designated Pegkeeper pool through an algorithm to stabilize the anchor of crvUSD. There are currently four pools, namely crvUSD/USDT, crvUSD/USDC, crvUSD/USDP and crvUSD/TUSD. Each Pegkeeper is assigned a maximum debt that can be supplied into its corresponding pool. Currently, the maximum debt of each Pegkeeper is 25 million crvUSD, and the maximum total debt of Pegkeeper is 100 million crvUSD.

The AggregatorStablePrice contract is critical to Pegkeeper as it aggregates the price of crvUSD from at least three price sources (currently four Pegkeeper pools). Pegkeeper will only supply crvUSD if the crvUSD price quoted by the Aggregator is greater than $1.

Taking TUSD as an example, the following conditions must be met for Pegkeepers to supply crvUSD:

• More than 15 minutes have passed since the last update.
• The TUSD balance in the pool is greater than the crvUSD balance.
• The crvUSD price quoted by the aggregator is greater than $1.
• If the conditions are met, supply an amount of crvUSD equal to 1/5 of the balance difference.

The chart below shows crvUSD supply by origin over time. The blue column represents the crvUSD supplied by Pegkeepers, which reached a peak of 40.6 million crvUSD in mid-August (40.6% utilization). The recent rise in Pegkeeper utilization coincided with a sharp drop in the cryptocurrency market, driving up demand for crvUSD. As of August 18, the total crvUSD supply was 125.5 million, with 85 million borrowed from collateral. This equates to 32.27% of crvUSD supplied by Pegkeepers and 67.73% lent from collateral.

Any Pegkeeper asset (such as TUSD) that loses its peg, whether permanently or over a long period of time, will have undesirable consequences. Because the aggregator checks the pool balance to determine the crvUSD price, it could incorrectly quote crvUSD at >$1 when the Pegkeeper asset is unpegged. This will allow Pegkeeper to supply crvUSD to the pool up to its maximum debt amount. The chart below shows a simulation of how quickly Pegkeeper might supply crvUSD with different unanchoring severities:

These were collected by simulating a loss of peg in Brownie at the state of the pool on August 8th. Regardless of the degree of loss of peg, almost all available Pegkeeper debt is introduced during a loss of peg event lasting 4-5 hours.

It is important to note that these data are isolated and in reality would cause liquidity providers in other crvUSD pools to reduce their crvUSD exposure, resulting in a loss of peg proportional to the amount of unbacked crvUSD entering circulation. Losing the peg will reduce the price of the AggregatorStablePrice offer, restricting additional Pegkeeper crvUSD from entering circulation, and enabling the DAO to take mitigation measures, crvUSD provided by a Pegkeeper pool that loses the peg will become a bad debt for the protocol (assuming the loss of the peg is permanent) .

crvUSD not only depends on its Pegkeeper pools to maintain stability, but also depends on them to ensure the continued solvency of crvUSD. Therefore, it is critical to assess the protocol's exposure to potential Pegkeeper debt (i.e., the largest debt), in proportion to the total crvUSD supply, and taking into account the peg confidence of each Pegkeeper asset.

Criticism on TUSD Transparency:

1. Opaque reserve management: TUSD offers significantly less transparency than its competitors regarding its custody partners and reserve portfolio.

2. Opaque verification: TUSD provides relatively little detail in its proof documents, which calls into question the validity of its proof-of-reserve system and may give users a false sense of security.

Criticism 1: Opaque reserve management

Obfuscation of reserve accounts

TUSD’s supporting documents did not specifically mention the name of its reserve account, but generally described its reserves as deposited in a Hong Kong reserve institution (previously disclosed as First Digital Trust), a Bahamian reserve institution (previously disclosed as Capital Union Bank) and a Swiss reserve institution.

With a significant portion of TUSD reserves being transferred to offshore entities, the escrow account structure has become more murky. TokenInsight reported on March 16, 2023 that TrueUSD’s previous operator, Archblock, had moved the token’s $1 billion in reserves to Capital Union Bank in the Bahamas due to deteriorating banking conditions for U.S. crypto businesses. Capital Union Bank, located in Lyford Cay, Nassau, is an independent banking institution providing private banking services regulated by the Central Bank of the Bahamas and the Securities Commission.

Additionally, a note recently added to the supporting documents indicates that Techteryx opened a corporate account with a Swiss reserve institution on April 21. Documentation disclosing the account's terms does not expressly provide important protections for TUSD holders, namely:

Funds in the account are escrowed on behalf of TUSD token holders.

The Agent has no right to use the funds in the account at any time.

Any amount deposited into an Account does not become the property of Techteryx, its agents, or any other entity.

Any amounts deposited into this account will be free from debts, liens or encumbrances of Techteryx, its agents or any other entity.

Excerpts from the proofs follow:

The recent addition of this account further highlights the reserves held by Techeryx partners and the lack of clarity between publisher and user funds. Such a setup can easily lead to commingling of customer deposits or misuse of business account funds.

**With respect to assets held with an unnamed custodian, the portfolio backing TUSD is disclosed in general terms as comprising: **USD cash, cash equivalents and highly liquid, short-term, adequate credit quality investments, Easily convertible to known amounts of cash, the Hong Kong custodian also invests in other instruments to generate yield.

There are no further details regarding portfolio asset balances or amounts held with each custodian other than this general description. The Hong Kong account used the vague phrase "other instruments". The riskiness of the assets in this account is not clearly marked, and because the accounting statements used for the vouchers are disclosed at "cost", these investments may have experienced a considerable depreciation that is not reflected in the vouchers come out.

Readers are advised to compare TUSD’s credentials (available on TUSD’s website) with the latest credentials of key competitors USDC (June 2023), USDT (June 2023) and USDP (June 2023). In contrast, these issuers disclosed more information about custodians and reserve asset portfolios.

June 2023 Market Panic: Prime Trust Collapse

Prime Trust is a Nevada-chartered trust company that provides B2B custody, custody, compliance, statutory processing, transaction software, and other financial services. TUSD has maintained an ongoing partnership with Prime Trust since August 2019, when the partnership agreement was first announced. It utilizes Prime Trust for 24/7 fiat currency transfers for its stablecoin products, including TrueUSD (TUSD), TrueGBP (TGBP), TrueAUD (TAUD) and TrueCAD (TCAD).

On June 21, 2023, the Financial Institutions Division (FID) of the Nevada Department of Industry and Commerce ordered Prime Trust to cease all activities after it was found to be in violation of state regulations. The company's financial condition was found to be extremely inadequate, resulting in an inability to honor customer withdrawals and protect assets in its custody.

In 2020, an upgrade to its wallet management system went awry, apparently leading to a discovery in December 2021 that Prime Trust had made funds in its traditional wallets inaccessible. Prime Trust allegedly began using deposits from other users to purchase cryptocurrencies to satisfy withdrawal requests. The Nevada Department of Financial Institutions found that the custodian owed customers $85 million in fiat currency and only had $3 million on hand. It claims Prime Trust has negative $12 million in shareholders' equity and has become de facto insolvent.

TUSD exposure to Prime Trust risk

Before the Nevada financial regulator issued a shutdown order, rumors about TUSD's insolvency were circulating in the market. TUSD announced on June 9th that minting through Prime Trust will be suspended until further notice (other minting/redemption services will still be available). The news sparked a relatively short-lived market panic.

TUSD then dropped sharply from the peg on Binance US, dropping to lows of $0.80. It is worth noting that this is not a market-wide unanchoring event. Binance US’s battle with the SEC, trouble finding a banking partner, and its own exposure to Prime Trust put the exchange’s reliable deposits and withdrawals at risk.

Following the shutdown order, TUSD initially announced on June 22 that they did not have any exposure to Prime Trust. But in the TUSD funding report on June 28, there appears to be $26,000 of TUSD exposure. Despite this insignificant amount, users at the time reported being unable to mint/redeem TUSD, which continued to spark panic as market participants remained wary of possible undisclosed additional exposure.

According to TUSD representatives, the $26,000 came from random users’ funds in Prime Trust, which auditors included on TUSD’s balance sheet, emphasizing that this amount was not actually related to TUSD.

Report of redemption failure

When Prime Trust went down in mid-June, reports began to emerge that multiple users appeared to be unable to cash out TUSD, instead returning their TUSD to their wallets. This is in contrast to TUSD’s announcement on June 9, which stated that while minting through Prime Trust has been suspended, all other custody partners are intact and there has been no disruption in minting or redemption services.

Prime Trust was shut down on June 21, coinciding with reports of redemption issues. Blockchain analytics firm @Chainargos and self-proclaimed former TUSD employee @willmorriss4 provided on-chain transaction logs for failed redemption attempts between June 10th and June 23rd:

A representative of TUSD responded that these transactions were transactions that users were trying to send to Prime Trust, even though they have publicly announced that minting/redemption through Prime Trust has been suspended. They further emphasized that anyone can still redeem TUSD without restrictions 24/7 through other custody partners.

Criticism 2: Opaque Validation

LedgerLens System

Real-time confirmation is provided by The Network Firm LLP through their LedgerLens system to provide real-time reserve data. The service queries the total supply of TUSD on all chains (ETH, AVAX, BNB, TRON, BSC) on a daily basis, as well as the total account balances of Techteryx’s custody partners in multiple depository institutions, as shown below, from Confirmation report for July 28:

Ripcord is an alert system embedded in the verification service to define blocking conditions for automatic confirmation updates. They are used to instrument systems because sometimes external APIs used for validation may not be available due to maintenance, outages, or inaccuracies.

There are four types of ripcords (the emphasis is on the "balance" ripcord):

1. Management: During the previous reporting interval, management made unacknowledged representations, representations, or failed to acknowledge the terms of the participation agreement.

2. Integration: In the last reporting interval, a smart contract call returned an error, and excluding this error triggers the balance Ripcord (see below).

3. Pricing: Does not matter for stablecoin confirmation. Indicates that an API error or non-response occurred while applying USD (or other fiat-denominated) value from the pricing source to the collateral asset.

4. Balance: Responses, errors, or non-responses from third-party systems or accounts that resulted in total liabilities being greater than total assets during the previous reporting interval. This may be a temporary imbalance due to normal operations, such as a customer opening a bank account that has not been integrated, or it may be due to an actual imbalance of liabilities and assets.

As the Prime Trust situation unfolded, the "management" Ripcord was triggered on June 13, followed by the "balance" Ripcord on June 20. TrueUSD clarified on June 22 that this trigger was due to a delay in the API interface of the added banking partner (presumably an unnamed "Swiss depository"), and at that time, confirmations had returned to normal . A representative of TUSD also mentioned that they are the only stablecoin with real-time confirmation, and the bank’s API cannot reflect the amount in real time.

Previous criticism in March 2023 pointed out that the confirmation of other stablecoin products (including TrueAUD, TrueHKD, TrueCAD and TrueGBP) has become increasingly outdated, raising concerns about transparency. At the time of writing, confirmations for these stablecoins were last updated on June 22, and the "governance" Ripcord is currently triggered.

Chainlink PoR Integration Introduction

TrueUSD uses Chainlink's Proof of Reserve (PoR) technology to increase the transparency and reliability of TUSD by regularly verifying the full collateralization of stablecoins.

As shown in the diagram above, the minting and redeeming process depends on available reserves and involves the following steps:

1. The Network Firm, an independent accounting firm, uses its LedgerLens attestation service to request USD reserve data from TUSD’s custodian bank account.

2. Obtain the USD reserve balance in the escrow bank account.

3. Chainlink, a decentralized oracle network, queries The Network Firm's API off-chain.

4. Chainlink retrieves the USD reserve balance reported by The Network Firm API.

5. If there is a deviation in the account balance, perform an on-chain transaction to update the TUSD Proof of Reserve contract.

6. The TUSD token contract autonomously verifies reserves when needed.

7. The availability of TUSD minting depends on the reserve compared to the TUSD supply:

• If the TUSD supply exceeds the available reserves, minting of new TUSD tokens will be stopped to ensure the stablecoin remains fully collateralized.
• If the TUSD supply is less than or equal to the reserve, TUSD tokens will be allowed to be minted, up to the unutilized reserve, maintaining an appropriate collateral ratio.

As shown in the figure below, TUSD's _mint function will check whether the reserve value passed in from chainReserveFeed is sufficient before allowing TUSD to be minted:

The integration with Chainlink claims to provide users with accurate and transparent information about the reserves backing TUSD, making it a more reliable collateral and payment method in the DeFi space.

Stable currency verification: The information is not comprehensive enough

The Network Firm’s reserve report of TUSD provided through Chainlink’s PoR has limited transparency and does not disclose specific details, such as:

• Full range of corporate liabilities
• Bank relationship
• Composition of asset portfolio
• Market value of reserves (reserves are calculated at "cost")

This makes it difficult for users to fully assess the stability and legitimacy of reserves.

The purpose of stablecoin verification is to prove that the entire stablecoin supply is fully cashable, and proof of solvency can be achieved by ensuring that both reserves and liabilities are fully accounted for.

Proof of Solvency = Proof of Reserves + Proof of Liabilities

While most TUSD liabilities can be found on-chain (i.e. issued TUSD), there can be significant off-chain liabilities. Audit providers for stablecoins, including The Network Firm (TNF), often provide snapshots of reserves that do not capture the full extent of a company’s liabilities. Hidden or undisclosed liabilities may affect the usability and backing of stablecoins, complicating certain proofs of solvency.

As mentioned earlier, the depositories controlling TUSD reserves were only described in the audit as the Hong Kong depository, the Bahamas depository, and the Swiss depository. The portfolio backing the TUSD is similarly vague, disclosing only that it contains U.S. dollar cash, cash equivalents, and short-term, highly liquid investments of sufficient credit quality to be easily convertible into known amounts of cash (the Hong Kong depository also invests in other generating income tool).

The Network Firm LLP's Assumption of Trust

According to the disclosure of TUSD in the Chainlink PoR data source, the audit data relies entirely on The Network Firm LLP. The auditor’s credibility and independence have been called into question, especially given The Network Firm’s links to Armanino, which has come under scrutiny for its former business relationship with FTX US.

The Network Firm responded to questions about its association with Armanino, calling it an "accidental or deliberate misrepresentation" and emphasizing that The Network Firm is an independent accounting firm specializing in the digital asset space, distinct from Armanino . Many current team members are founding members of Armanino's digital asset industry practice. After the failure and controversy of FTX, Armanino decided to reduce the audit services in the field of digital assets. The Network Firm LLP was formed in October 2022 with no equity interest in Armanino, and only one founding member had worked on FTX US's 2021 financial statement audit.

A representative of TUSD responded that the premise to consider this connection as malicious distribution (FUD) is invalid because Armanino has a business relationship with FTX US, but the latter did not lose client funds. Armanino is also an auditor for large crypto platforms such as Kraken. Armanino is confident in the outcome of its partnership with FTX US, and aside from adverse media coverage related to this association, there is no evidence that Armanino or The Network Firm failed to meet their responsibilities or were guilty of any wrongdoing.

A final note on PoR While stablecoin verification is far from perfect and requires trusting auditors and stablecoin issuers to provide correct data and operate responsibly, they are positive steps towards promoting transparency and accountability. By voluntarily conducting and issuing verifications, TUSD demonstrates an effort to build trust between users and regulators, and it demonstrates a commitment to financial transparency and responsible practices.

On the other hand, some key information is not publicly available regarding custody partners and their relative exposure to each institution, the portfolio of assets backing TUSD, and the company's liabilities, all of which may affect TUSD's support. When this information is not public, users need to be aware of the trust assumptions involved, and in particular be aware of the limited usefulness of proof-of-reserve systems like Chainlink PoR when much of this information remains private.

Risk Advice

TUSD has made significant efforts to build trust in solvency through real-time verification and on-chain proof of reserves. It features as the first USD-backed stablecoin with programmatically enforced minting limits based on off-chain reserves.

However, there are legitimate criticisms that Techteryx’s transparency policy is insufficient, as the issuer does not provide reasonable assurances regarding the solvency of the stablecoin. TUSD provides little information on the status of its reserves compared to its competitors. It does not disclose the names of the custodians, the balances of each custodian, or details of the portfolio. TUSD is currently the only Pegkeeper that does not disclose such information (compare with recent verifications of USDC, USDT, and USDP).

The current Pegkeeper model may cause crvUSD to de-peg or in the event of Pegkeeper assets de-pegging, the protocol accumulates bad debts. Given the importance of Pegkeepers to the stability of crvUSD, special scrutiny and minimum requirements must be set for these assets. In general, Pegkeeper candidates need to meet the following criteria:

1. Strong enough confidence in anchoring at the technical, operational and regulatory levels;

2. Candidates should complement the Pegkeeper asset basket by bringing in diversity of issuers, custodians, and geographic jurisdictions.

To achieve this, candidates should be convertible stablecoins with efficient arbitrage paths and should be compliant with regulations in the jurisdictions in which they operate. In general, Pegkeeper baskets should not be concentrated in any single jurisdiction, nor in white label products with the same issuer and/or custodian (such as Paxos USDP and PYUSD).

We believe that TUSD should not be included in crvUSD Pegkeepers until crvUSD Pegkeepers are upgraded and preventive measures are taken to mitigate the negative impact of Pegkeeper asset unpegging. Our rationale is that, given Techteryx's current transparency policy, we cannot feel confident in the solvency of TUSD or its peg. Reducing the maximum debt of TUSD as a Pegkeeper to zero will not have a great impact on the overall situation (meaning that even if TUSD cannot continue to act as a Pegkeeper, there are other Pegkeepers that can continue to function and remain stable), because there are 3 other Pegkeepers with a total maximum debt of $75 million. Since May, crvUSD had the largest Pegkeeper debt utilization in history of $40.6M (on Aug. 18).

An argument for lowering the maximum debt, rather than down to zero, might be to ensure geographic diversity of Pegkeepers. Increasing the proportion of Pegkeeper assets established in the United States may increase the risks associated with the regulation of stablecoins in the United States. If the DAO agrees with this reasoning, it is recommended to set the maximum debt of TUSD Pegkeeper to a conservative value, such as $5 million.