Stablecoins have been getting quite popular with cryptocurrency investors of late. Gemini too, started off with their own stablecoin, the Gemini Dollar, known popularly by its ticker code: GUSD. However, almost a week after the currency’s release, it has already been shrouded by a controversy - as blockchain researcher Alex Lebed has discovered that Gemini can freeze the account of any user.
Alex Lebed performed a review of the GUSD code, and found out that the smart contract has a provision where the ‘custodian’ of the currency, which is Gemini in this case, can freeze any account on their discretion. While this is just a clause in the smart contract that Gemini may or may not practice - and may even use for constructive purposes such as stopping cryptocurrency theft, it does have multiple other implications which are seemingly quite dangerous.
Cameron and Tyler Winklevoss, the owners of Gemini had stated multiple times that the Gemini Dollar is the first ‘Trusted and regulated digital representative of the US Dollar’. Hence, it was clear from the get-go that there were going to be regulations in place. And just like the US Dollar, the flow of Gemini Dollars from one account to another can also be frozen.
The Gemini Dollar whitepaper explains why there must be oversight because the currency is tied to a physical asset (one GUSD is pegged with one USD):
“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.”
In addition to this, Lebed also discovered that the Gemini Dollar makes use of an ERC20 proxy contract, which allows the custodian (Gemini) to upgrade the contract every 48 hours. This too can have serious implications in the long run - as a scenario may arise when an upgrade to the contract can render these tokens as non-transferable.
The aforementioned regulatory supervision that Gemini talks about will come from New York Department of Financial Services (NYDFS) - the organization that issues BitLicense. Gemini, which issues these tokens also holds the BitLicense. The firm has to comply with the NYDFS’s regulatory requirements to operate their stablecoin. Here are some of the NYDFS compliances:
“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. 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.”
These steps are necessary for Gemini to take in order to ensure that they remain in good terms with the regulatory bodies, as well as to ensure that their stablecoins are a safe space for traders.