Gemini USD (GUSD): what happened to one of the once most famous stablecoins?

Stablecoins protect investors from the high volatility of digital assets like Bitcoin and altcoins like Ethereum, BNB Coin, Solana, and all the rest. In addition, stablecoins are a great alternative to fiat as they allow for cheap transfers anywhere without any restrictions.

What is Gemini USD?

GUSD is a classic centralized steblecoin pegged to the US dollar exchange rate. It was issued as an ERC-20 token on the Ethereum blockchain in September 2018. What distinguishes Gemini USD from other digital assets of its kind, such as Tether (USDT) and USD Coin (USDC), is that it is regulated by the New York State Department of Financial Services (NYDFS).

GUSD is thus one of the first regulated stablecoins in the world. Notably, another famous stablecoin, Paxos (USDP), was released on the same day as Gemini USD and received approval to launch from the New York State Department of Financial Services.

As you can guess from the name, GUSD is issued by the cryptocurrency exchange Gemini, which was founded in 2014 by the Winklevoss brothers.

How does Gemini USD issuance work?

The process of issuing and redeeming GUSD tokens is almost no different from the one embedded in USDT, USDC, and the like: an investor can exchange US dollars for stablecoins and back via the official website of the issuer Gemini Trust Company LLC. It works like this:

1. First, the user registers on the site and performs an identification procedure.
2. Then, the user deposits US dollars into a special account provided by the issuer, Gemini Trust Company LLC, and receives an equivalent amount of GUSD in the specified cryptocurrency wallet. These tokens are generated through a special smart contract, the security of which has been verified by the world-renowned audit firm Trails of Bits.
3. If the user wants to exchange GUSD for US dollars back, he or she will need to return the stablecoin to a particular address provided by the issuer. In this case, the GUSD tokens will be burned using the same smart contract, and in return, the company will send an equivalent amount of US dollars to the counterparty's account.

The GUSD tokens are redeemed using a reserve that consists entirely of US dollars. Another notable feature of Gemini USD is that the reserves of this stablecoin are insured by the Federal Deposit Insurance Corporation (FDIC). GUSD reserves are certified monthly by the accounting firm BPM LLP. In addition, BPM conducts surprise audits on a random day of each month.

Gemini USD reserves themselves are held at Boston-based State Street Bank. Although the GUSD token smart contract is also on the Near Protocol network, almost all GUSD tokens are traded on the Ethereum network.

According to CoinMarketCap, only 120.5 million GUSD tokens have been issued as of April 2024. Although GUSD is one of the most well-known stablecoins in the crypto market, it is not even among this category's top ten capitalization assets.

GUSD's prospects and challenges

Although Gemini USD has no currency peg problems and its exchange rate has never lost parity with the US dollar, unlike the same USDC and True USD (TUSD), its low capitalization indicates a low demand for this stablecoin.

The relatively low demand for Gemini USD, in particular, is due to the fact that few DeFi protocols (e.g., DEX exchanges and lending platforms) support this stablecoin. In general, USDT and USDC tokens are most prevalent on decentralized platforms. Due to low demand for the GUSD stablecoin, the OKX exchange even delisted this token in early 2023.

Perhaps also the reason for the delisting and low demand was the investigation by the New York State Department of Financial Services, which approved the issuance of Gemini USD against the issuer of this stablecoin for potentially defrauding customers.

Although the company did not comment on the investigation initiated by the NYDFS or on the delisting from the OKX exchange, the American news outlet Axios suggested that all this could have happened due to the closure of the Gemini Earn division, which, in turn, could be related to the company's financial problems.

This assumption was quite logical since, at that time, the crypto market was experiencing a significant decline, which negatively affected the financial performance of crypto exchanges and other companies working in cryptocurrencies. The official reason for Gemini Earn's closure was the bankruptcy of its partner firm, Genesis, which could not fulfill its obligations to the service's clients. In total, its debt amounted to about $900 million. This situation hit Gemini's reputation and the GUSD stablecoin itself hard.

Starting in November 2022, when the capitalization of Gemini USD reached $830 million, this indicator began to fall rapidly and, in just one year, fell to almost $160 million. Despite this, the asset GUSD itself passed the test of strength, as its rate remained "afloat." At most during this period, the price of GUSD stablecoin deviated to $0.97, but after that, it recovered quickly enough.

Amid the launches of new, more promising stablecoins such as Binance's First Digital USD (FDUSD) and Ethena USDe, Gemini USD can hardly be expected to rehabilitate itself somehow, at least not unless the issuer does something breakthrough (e.g., at least refund money to aggrieved customers).