The National Institute of Standards and Technology (NIST), an unregulated agency of the US Department of Commerce, has released an initial public draft that highlights various security considerations related to stablecoin architecture and implementation.
Based on a study of the top 20 stablecoins over the past year, NIST found that the top 5 coins that held their pegs accounted for 87% of the total market capitalization of the top 20 coins. I managed to keep the wedge.
Coincidentally, all five coins were pegged to the US dollar and had an average minimum value of $0.9934 (-0.66%) and a minimum value of $0.9871 (-1.29%) throughout the study period.
NIST also drew attention to the death spiral of TerraUSD (UST), the third largest stablecoin by market capitalization at the time of the study, which lost its peg in May 2022. Some of the security concerns raised in the report include unauthorized or arbitrary issuance, theft of collateral, points Vulnerabilities in smart contracts, oracle data, and underlying blockchain exploitation.
Given the trust given to issuers of stablecoins, NIST suspects that the creators, moderators, and administrators of stablecoin systems may use their privileged position to deceive or misuse investors and owners. Summing up, NIST stated:
“This security analysis shows that two stablecoins that function almost identically in third-party markets and allow you to buy and sell commodities with coins at a fixed price can have completely different risk profiles.”
According to NIST, decentralized finance (CeFi) architectures are more prone to trust issues due to greater reliance on human trust, while decentralized finance (DeFi) is generally more prone to security issues due to the increased complexity of smart contract code and critical functionality.
Related: Stablecoins have lost $38 billion since May due to lower revenue and project collapse
On October 3, the Department of Justice (DOJ) objected to Celsius’ proposal to resume withdrawals for specific clients and sell its stablecoin holdings. According to William Harrington, Secretary of the US Department of Justice:
“The requests are premature and should be rejected until the expert report is provided. First, the withdrawal request seeks to allocate funds impulsively to one group of creditors until a full understanding of the debtors’ crypto holdings is obtained.”
Concluding the discussion, Harrington stated that the petition should not be considered until the expert report has been submitted, stating that “any distribution or sale should be delayed until the parties involved, the trustee and the court can make a decision.” About the value of Celsius’ liabilities, claims on him, and his assets, and that “debtors already intend to repay their creditors.”