What is First Digital USD (FDUSD)?
First Digital USD (FDUSD) is a stablecoin issued by FD121 Limited, a subsidiary of Hong Kong-based financial group First Digital Limited. FDUSD is backed by one US dollar or asset of equivalent value held in reserve accounts at the designated custodian, First Digital Trust Limited.
As a trust company registered under the laws of Hong Kong, First Digital Trust Limited is mandated to preserve all FDUSD reserves in segregated accounts. This means there is no mixing of FDUSD reserves with the company’s other assets. Reserves are also required to be held in cash or highly liquid assets, which the company claims helps ensure 1:1 backing of FDUSD.
The FDUSD issuer publishes a “reserve attestation” report audited by independent auditors to demonstrate that the amount of FDUSD in circulation is fully backed by an equivalent value of cash or other assets. Cash equivalent assets are held in a custodial fund.
FDUSD is issued on the Ethereum and BNB Chain networks at launch, but there are plans to be released on other blockchains in the future. With many stablecoins already on the market, FDUSD seeks to provide additional tools for diversification for users interested in using stablecoins.
What are the use cases of FDUSD?
FDUSD offers a variety of use cases, including:
- Transfer money: FDUSD can be used for fast and low-cost cross-border transactions, providing an economical option for remittance services. Compared to traditional money transfer methods, stablecoins like FDUSD have much lower fees and transactions are completed more quickly.
- Payment solution: Similarly, FDUSD can be used by businesses and individuals to process payments with lower fees and faster processing times. This is especially valuable for international transactions, where traditional payment methods often add currency conversion and cross-border transfer fees.
- Price risk prevention: Given the volatility in cryptocurrency markets, FDUSD can be used as a hedge and a stable anchor during periods of strong price swings. Investors can convert other cryptocurrencies into stablecoins like FDUSD to lock in profits or protect investments from extreme market fluctuations.
- Usage in DeFi: Similar to other stablecoins, FDUSD can be used in various DeFi applications for yield farming, lending, borrowing, and staking.
How useful is FDUSD?
Cryptocurrencies offer many benefits over fiat currencies as a form of payment and in other use cases, providing faster transactions and lower fees, in addition to being safer and more secure. Better privacy protection.
Stablecoins like FDUSD are digital native instruments designed to maintain 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 risks of FDUSD?
FDUSD has several risk factors that users need to be aware of. These include:
- Risk of losing peg: FDUSD’s peg mechanism depends on its reserves being able to support the redemption of FDUSD at cost at any time for all redemption requests. Therefore, the safety and liquidity of reserve assets are key to the stability of FDUSD. FDUSD reserves are held under third-party custody, and can vary from highly liquid assets to illiquid assets. There are risks from the potential failure to meet the issuer’s promised stablecoin features, including notional value and timely redemption at cost.
- Operational risks: FDUSD is subject to operational risks, including fraud and cyber risks. FDUSD depends on third-party services such as exchanges and custodians, which all face different operational risks. Furthermore, there are no effective remedies for loss or theft of crypto assets, which could expose users to additional risks.
- Legal risks: The current regulatory environment for stablecoins is rife with uncertainty. Regulations in different jurisdictions vary widely and change rapidly, which may affect some FDUSD operations.
- Counterparty risks: FDUSD operations involve third-party financial intermediaries, which exposes users to counterparty risks. These risks can lead to delays in currency exchange and increased costs as stablecoin issuers rely on exchanges, market makers, banks and other money transmitters to facilitate currency exchange.
