Key Takeaways
Introduced in June 2023, First Digital (FDUSD) is a reserve-backed stablecoin issued by a subsidiary of Hong Kong-headquartered financial firm, First Digital Limited.
FDUSD launched on the Ethereum and BNB Chain networks, with plans to be issued on other blockchains in the future.
FDUSD provides an “attestation of reserve” report audited by independent auditors to demonstrate that FDUSD is fully supported by an equivalent value of cash or cash equivalents.
What Is First Digital USD (FDUSD)?
First Digital (FDUSD) is a stablecoin issued by FD121 Limited, a subsidiary of Hong Kong-headquartered financial firm, First Digital Limited. Introduced in June 2023, FDUSD is intended to be backed by one U.S. dollar or asset of equivalent value held in reserves with its appointed custodian, First Digital Trust Limited.
As a trust company registered under Hong Kong law, First Digital Trust Limited is mandated to safekeep all FDUSD reserves in segregated accounts. It means there is no commingling of FDUSD reserves with other assets at the firm. Reserves are also mandated to be held in cash or highly liquid assets, which the firm claims to help ensure the 1:1 backing of the FDUSD.
The issuer of FDUSD publishes an “attestation of reserve” report that’s audited by independent auditors to show that the supply of FDUSD in circulation is fully supported by an equivalent value of cash or cash equivalents held in custody.
FDUSD was issued on the Ethereum and BNB Chain networks at launch, but has plans to be issued on other blockchains in the future. With many stablecoins already in the market, FDUSD seeks to offer additional instruments for diversification to users interested in using stablecoins.
Why Is FDUSD Useful?
Cryptocurrencies offer many advantages over fiat currencies as a form of payment and in other use cases, providing faster transactions and lower fees, in addition to being more secure and privacy-preserving.
Stablecoins like FDUSD are digital native instruments that are designed to maintain a stable value, helping to bridge the traditional financial ecosystem and the cryptocurrency market. Stablecoins like FDUSD allow fiat currencies to be represented in the crypto world while being able to move more freely and efficiently.
What Are the Use Cases of FDUSD?
FDUSD offers various uses cases, including the following:
1. Remittances
FDUSD can be used for fast and cost-efficient cross-border transactions, providing an economical option for remittance services. Compared to traditional bank wires or transfers, stablecoins like FDUSD have much lower fees and transactions are completed more quickly.
2. Payment solutions
Similarly, FDUSD can be used by businesses and individuals to process payments with lower fees and faster processing. This is particularly valuable for international transactions, which traditional payment methods often charge additional currency conversion and cross-border transfer fees.
3. Hedging against price volatility
Considering the volatilities in the crypto markets, FDUSD can be used as a hedge and an anchor of stability during periods of volatile price movements. Investors can convert other crypto into stablecoins like FDUSD to lock in gains or protect their investments from extreme market swings.
4. Usages in DeFi
Similar to other stablecoins, FDUSD can be used throughout various DeFi applications to do yield farming, lending, borrowing, and staking.
What Are the Risks of FDUSD?
FDUSD has some risk factors that users need to be aware of. They include the following:
1. Risks of depegging
FDUSD’s pegging mechanism depends on its reserves’ being able to support the redemption of FDUSD at par at any given time for all redemption demand. Therefore, the safety and liquidity of the reserve assets is key to FDUSD’s stability. FDUSD’s reserves are held in custody by a third-party, and can vary from highly liquid to illiquid assets. There are risks from the potential failure of the issuer to fulfill the claimed stablecoin features, including its nominal value and timely redemption at par.
2. Operational risks
FDUSD is subject to operational risks, including fraud and cyber risks. FDUSD relies on third-party services such as exchanges and custody services, which are exposed to various operational risks. Moreover, there are no effective remedies for the loss or theft of crypto assets, which could expose users to additional risks.
3. Regulatory risks
The regulatory environment for stablecoins is currently full of uncertainties. The rules in different jurisdictions vary greatly and evolve rapidly, which could impact certain FDUSD operations.
4. Counterparty risks
The operation of FDUSD involves third-party financial intermediaries, which expose users to counterparty risks. These could lead to delays in redemptions and increased costs because stablecoin issuers depend on exchanges, market makers, banks and other money transmitters to facilitate redemption.
Closing Thoughts
The stablecoin market is projected to grow to trillions of dollars in the next five years, up from just over $100 billion as of mid-2023, according to market researchers. FDUSD is among the many new entrants in the flourishing stablecoin space.
As the adoption of cryptocurrencies continues, both traditional financial institutions and crypto-native entities are increasingly looking at issuing their own stablecoins, tailored to their niche markets and target audiences. This suggests that users will have a broader range of choices when deciding on the best stablecoins for their needs.
However, while stablecoins come with numerous benefits, they aren't without risks. Users should exercise caution and conduct detailed research before engaging with any stablecoin. Always make it a point to review the stablecoin’s whitepaper, reserve reports, audit findings, and any related legal disclaimers, which are usually available on the stablecoin’s official website.
Further Reading
Disclaimer: In compliance with MiCA requirements, unauthorized stablecoins are subject to certain restrictions for EEA users. For more information, please click here.
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