- USDf, a synthetic dollar token issued by Falcon Finance, lost its dollar peg on July 7, dropping as low as $0.992.
- Falcon Finance claims USDf is overcollateralized with $630 million in crypto, but only $25 million is held on-chain.
- The majority of reserves are stored off-chain with custodians and remain opaque, raising transparency concerns.
- Critics and risk analysts question the backing and the use of illiquid assets for USDf’s collateral.
- Falcon Finance promises more details about reserve composition and a higher-grade audit in response to scrutiny.
On July 7, Falcon Finance‘s USDf token, which aims to keep a $1 value, dropped below its peg to $0.992. The token, called a “synthetic dollar,” had a market value of about $550 million and is ranked as the fifteenth largest stablecoin worldwide.
The company states on its website that USDf is backed by $630 million in crypto assets, making it more than fully backed, as there are only about $550 million USDf tokens in circulation. However, Falcon Finance holds just $25 million of these reserves on-chain, while the remaining $607 million is kept off-chain by four custodians: Binance, Fireblocks, Ceffu, and ChainUp. Company CEO Andrei Grachev said about 89% of reserves are in stablecoins and Bitcoin, with the remaining 11% in other cryptocurrencies.
Criticism has increased on social media about the lack of transparency over the reserve composition. Only the dollar amount held by each custodian is publicly listed in the daily reserve reports, which are provided by accounting firm Harris & Trotter. The firm is also working to prepare an ISAE 3000 audit report. Falcon Finance has promised to share a detailed breakdown of the assets next week.
USDf uses profits from trading strategies, such as basis trading and arbitrage, to help keep its peg. Grachev said, “Every minted USDf must be backed by a stablecoin or hedged position that represents dollar value and has no directional risk.”
Some experts are concerned about risks linked to USDf. Risk firm LlamaRisk reported that Falcon Finance has the sole authority to manage reserve assets, which could lead to potential problems from mismanagement. It also pointed out that some lesser-known or thinly traded tokens could be used as collateral to mint a large amount of USDf, raising worries about liquidity.
DWF Labs, parent of Falcon Finance, has faced past controversy, including accusations of wash trading and having to dismiss a partner following misconduct allegations.
Further updates from Falcon Finance about reserve transparency and asset composition are expected next week.
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