GUSD Smart Contract Gives Gemini Broad Control
Writing on tech publication Good Audience, blockchain researcher Alex Lebed performs a code review of the Gemini dollar smart contract, finding that, contrary to the ethos and technical specifications of decentralized cryptocurrencies like bitcoin, GUSD includes a provision that allows its “custodian” — namely Gemini — to freeze any account.
Lebed — who, in full disclosure, is also attached to a separate stablecoin project — further notes that GUSD uses an ERC20Proxy contract that gives Gemini, as the custodian, the ability to upgrade the contract once every 48 hours, giving it among a myriad of other things the power to simultaneously render all tokens non-transferable.
It’s not entirely surprising that Gemini included a mechanism to allow it to freeze funds, given that Cameron and Tyler Winklevoss repeatedly touted GUSD as the first “trusted and regulated digital representation of the U.S. dollar,” both in the official announcement and in subsequent media appearances.
More than just an apparent slight at Tether, the controversial, fully-collateralized stablecoin issuer whose assets are reportedly stored in Puerto Rico, this statement is confirmation that Gemini wants its token to exist alongside and within mainstream finance, not outside of it.
The Gemini dollar whitepaper argues that, because issuing a cryptocurrency whose value is tied to physical assets stored in a centralized location involves some element of trust, that token must have oversight.
“Desirable outcomes in a system that relies (at least in part) on trust requires oversight. In the context of a stablecoin, we submit that the issuer must be licensed and subject to regulatory supervision. From this, transparency and examination become requirements of the system, ensuring its integrity and engendering market confidence…. Gemini operates under the direct supervision and regulatory authority of the New York State Department of Financial Services and is subject to the New York Banking Law and other applicable U.S. laws and regulations.”
That supervision, as detailed above, comes from the New York Department of Financial Services (NYDFS), creator of the controversial BitLicense regulatory framework. Gemini, along with fellow New York-based company Paxos, who also released a stablecoin this week, holds an NYDFS charter and must submit to the agency’s stringent regulations governing cryptocurrency companies.
In addition to ensuring that GUSD and the Paxos Standard (PAX) to remain fully backed by physical dollars at all times, the NYDFS said in a statement that it requires the firms to “prevent and respond to any potential or actual wrongful use of stablecoin, including but not limited to its use in illegal activity, market manipulation, or other similar misconduct.”
Additionally, Gemini and Paxos must:
“Implement, monitor and update effective risk-based controls and appropriate BSA/AML and OFAC controls to prevent the Gemini Dollar or Paxos Standard Token from being used in connection with money laundering or terrorist financing.”
Stablecoins: A Corrupt Bargain?
Tether, the largest stablecoin, serves as a proxy for USD on dozens of cryptocurrency exchanges.
Nor is this element of control unique to Gemini’s stable cryptocurrency. Rather, it stems from the inherent centralization of this stablecoin model, regardless of how closely-regulated a particular issuer is. While fully-collateralized stablecoins ensure price stability, their issuers must also submit to regulatory guidelines and other external pressures. (Other stablecoin models, including those that use an algorithmic process to maintain a synthetic peg to the dollar, carry their own risks.)
When Tether’s treasury address was hacked last year, the company released what was effectively an emergency fork to blacklist the more than $30 million in stolen funds and prevent the attackers from spending them. While node operators could technically have refused to follow the fork, the fact that USDT’s underlying assets can only be redeemed from Tether means that the company could have refused to honor tokens on the original chain.
Similarly, GUSD can only be redeemed for physical USD at Gemini, ensuring that, even absent the ability to lock accounts and freeze funds, Gemini has absolute censorship authority over the underlying assets that give the token value. This way, though, Gemini can more effectively halt the flow of funds if they become involved in money laundering or other illicit activities.
Regardless of the justification, many cryptocurrency diehards may find this arrangement a corrupt bargain, but, frankly, GUSD probably wasn’t built with these users in mind anyway.
And, on the other hand, some users may find comfort in the fact that, just as federal and state regulations require Gemini to include functionality that enables them to stop the token from being used for illicit purposes, those regulations also include provisions that should prevent Gemini from arbitrarily freezing funds indefinitely or stealing tokens outright. Holding the token, like storing your funds in a bank, comes with its trade-offs, and users must determine for themselves whether those trade-offs are tenable.