The USDF coin, a stablecoin with a market value exceeding $540 million, briefly lost its peg to the US dollar earlier today. This incident raised concerns due to USDF's connection to DWF Labs, a company closely associated with Donald Trump's cryptocurrency initiatives.
Falcon Futures, the issuer of the USDF coin, stated that the stablecoin is backed by collateral at a ratio of 116%. However, transparency regarding the reserves remains limited. It appears that most of the collateral is off-market, and the specific assets backing the stablecoin have not been disclosed.
Community concerns about USDF
Thanks to its partnership with DWF Labs, Falcon Finance's USDF stablecoin had a strong start, reaching a market value of $570 million in less than four months after its launch.
However, its recent loss of the peg to the dollar attracted significant attention from the cryptocurrency community. Within about an hour, USDF completely lost its peg to the dollar, dropping to 94.3 cents per token.
A closer look at the project's financial situation raised more questions. Both Falcon Futures and DWF Labs issued statements about the stablecoin, claiming it is backed by collateral at a ratio of 116%. However, Falcon's own data shows that more than $609 million of that amount is stored off-chain, compared to only $25 million in reserves within.
Furthermore, these reserves suffer from a severe lack of transparency. Falcon's audits do not address names, liquidity, volatility, or the potential impact on prices to liquidate any of the reserve tokens. DWF Labs claims it will publish a comprehensive analysis of the stablecoin's reserves next week, but it is currently in a state of complete ambiguity.
Future concerns
LlamaRisk, a company specializing in decentralized finance risk assessment, clarified the seriousness of this lack of transparency in a post on a forum. It is unclear why USDF lost its peg, but the lack of clarity represents a problem in itself.
Even if other stablecoins made up a significant portion of Falcon's reserves, there is no guarantee of the credibility of these assets. Any of them could have caused a loss of the peg:
The Falcon team has sole authority over the operational management of the reserve assets. Bankruptcy could occur as a result of poor operational management or failure of fundamental strategies, including exposure to CEX exchanges and DeFi strategies. As with similar products, Falcon relies on off-exchange custodians to mitigate losses.
This loss of parity has drawn sharp criticism from the cryptocurrency community. It may complicate the future launch of stablecoins and negatively impact DWF Labs. Moreover, DWF has become a permanent partner in President Trump's cryptocurrency empire in recent months.
The company, based in the United Arab Emirates, has faced successive scandals in recent years, including allegations of insider trading and one of its former partners being advanced for a position. Now, DWF Labs is cooperating with Trump to provide liquidity for World Liberty Financial's USD1 stablecoin, as part of the president's effort to make these assets a part of global dollar dominance.
With these ambitious goals, an incident like this seems highly concerning. What will happen if the DWF project faces another similar failure with the increasing integration of stablecoins with TradFi? What impact will this incident have on market confidence?
These are just some of the current concerns. However, looking to the past, the GENIUS Act will provide significant clarity on the reserves of U.S. stablecoins. Therefore, peg losses due to concerns and uncertainties may become less likely under this regulatory protection.