For a while we’ve been discussing the risk of having large amounts of T4 funds in BTC. The obvious volatility of BTC poses a risk to the actual worth of our reserve as calculated in USD. The problem scenario we are faced with would be a sharp decline in BTC value endangering the strength of our reserve and thus the peg. If BTC price would fall by say 40% we are faced with a strongly diminished value of our T4 reserves thus leading to less buy power to maintain the peg incase a lot of NBT are sold back to Nu.
To mitigate this we’ve started NSR buybacks to keep value within Nu free of BTC volatility. While the buybacks have been in my opinion very successful the problem with having only buybacks as hedging strategy is that we are reliant on buyers of NSR in case of emergency. Just like BTC volatility this poses a risk as we cannot guarantee we can sell enough NSR for a high enough price quickly enough to maintain the peg.
In the future other hedging options might present themselves but so far the other “stable” cryptocurrencies/assets have proven very lackluster. This means we are left with the option of hedging part of our T4 BTC in USD. Hedging in USD causes several problems for us as a decentralized organization such as Nu without a bank account. Since we cannot create a bank account or anything similar funds would have to be held in a centralized fashion. A problem with this is that a sudden transfer of large funds to someone’s back account will most likely create problems for that person with government agencies so this is out of the question.
Besides this incase these money is actually needed its most likely going to be needed on a relatively small timescale meaning transferring from a bank account to an exchange to buy BTC (or other assets we need to maintain the peg) will probably take too long. We are thus left with the option of holding the funds on an exchange account. Having them on an exchange account would enable us to relatively quickly buy BTC and transfer them to our buy side should the peg be endangered.
There is 2 problems to this strategy, 1 we need to solve the issue of centralization and 2 we are facing the risk of exchange default. To combat problem one the best solution would be collateral, aka the one holding the USD gives Nu crypto’s or other assets of equal value as collateral to mitigate the risk of theft. Problem 2 can only be solved in 2 ways, either shareholders accept that incase the exchange defaults they lose the USD or the person holding the USD on an exchange account accepts this risk.
The obvious advantage of this strategy is that part of our T4 reserve is in USD protecting us from BTC volatility and guaranteeing X amount of USD funds as a reserve incase the peg is endangered.
I’m considering stepping up and fulfilling this role if shareholders so desire, but I’m very keen to hear all of your thoughts about this.