Yesterday World Liberty Financial Inc. (“WLFI”) announced plans for the USD1 stablecoin. The Trump affiliated firm says it will initially issue it on Ethereum and the Binance Smart Chain, after Bloomberg reported Binance was in discussions with WLFI about a stablecoin two weeks ago. BitGo, a digital asset custody firm, will provide custody of the reserves.
The news comes following Trump’s Executive Order making stablecoins a cornerstone of his crypto agenda. If it remains on track, stablecoin legislation is expected to be finalized by the end of April.
WLFI’s parent is 60% owned by a company affiliated with Donald Trump and his family members, although only Eric Trump plays an active role. Last week the company announced it had raised a total of $550 million in sales of the WLFI token. Some of the 85,000 token holders complained that they had no role in the governance decision to issue the stablecoin.
WLFI is separate from the entity that issued the $TRUMP meme coin in January.
BitGo as custodian: tokenized reserves?
A notable aspect of the announcement was the selection of BitGo as custodian, which might be considered a controversial choice. BitGo is a digital asset custodian and has held a New York Trust license since 2021. But it would not be an obvious company to provide custody for conventional Treasuries.
That’s unless USD1 reserves won’t be held in conventional Treasuries but in their tokenized form. The latest iteration of the GENIUS Act stablecoin legislation inserted a new clause supporting this idea. What a coincidence!
That said, it is not a radical idea. Ondo Finance is one of WLFI’s partners and its USDY yield bearing coin invests in BlackRock’s BUIDL tokenized treasury fund. It’s a pragmatic strategy because everything is on chain, enabling automated redemption and issuance.
However, USDY is an investment token rather than a payment instrument. And a payment instrument demands lower risk. After all, the holders of USDY get a return but the holders of USD1 will not get any yield, so they expect the lowest risk.
Hence, the one major drawback of depending on tokenized assets for stablecoin reserves is the additional layer of risk. What if something goes wrong? What if the entity doing the tokenization of Treasuries gets hacked or runs off with the money?
Why BitGo?
BitGo is closely associated with another controversial WLFI ally, Justin Sun who is the founder of the TRON network. The initial offering of the WLFI token wasn’t going that well. Sun’s early investment of $30 million put it on the map.
Meanwhile, BitGo is the curator of wBTC the popular wrapped version of Bitcoin, and last year announced plans to transfer much of that responsibility, including two of three private keys, to BitGlobal, a new entity associated with Justin Sun. At the time, wBTC had a market capitalization of around $9 billion.
In response, the MakerDAO (now Sky) stablecoin protocol radically reduced its exposure to wBTC from $500 million to under $20 million today. The wBTC plan was watered down so that two BitGo entities now control two out of three keys.
A few years ago, Galaxy Digital planned to acquire BitGo, but the deal fell through after BitGo failed to deliver audited accounts. BitGo sued Galaxy, but surprisingly Galaxy recently started to work with the company again.
BitGo is not an unknown entity and has a few traditional finance associations. For example, Goldman Sachs is one of its backers and it provides services to Korea’s Hana Bank.
One takeaway from the USD1 announcement – keep an eye on changes in the GENIUS Act. They could show hints of USD1 plans.
