Crypto's Newest Stablecoin Is Inflation-Linked Bond Alternative

Yahoo

15-04-2025

(Bloomberg) -- A new cryptocurrency aims to occupy the final frontier of investor safety — cash that doesn't lose purchasing power to inflation.
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USDi, being launched by two veterans of US inflation-protected and foreign-exchange derivatives, is a dollar tracking stablecoin whose value is determined by the increase in the US consumer price index since December 2024. On April 15, it was $1.00863.
Inflation protection in US markets has been available to investors since 1997 via Treasury inflation-protected securities, or TIPS — government bonds whose principal is indexed to the US consumer price index, or CPI. But as bonds, they're subject to losses when interest rates rise, an outcome that took by surprise some of the investors who piled into TIPS ETFs as inflation accelerated in 2021.
USDi is comparable to TIPS principal or, theoretically, to an inflation-protected savings account, if such a thing existed, according to Michael Ashton, who began his career in inflation-protected investing at Barclays Plc in the early 2000s.
'The riskless asset doesn't actually currently exist, and that's inflation-linked cash,' Ashton said. 'Holding cash is an option on future opportunities, and the cost of that option is inflation. If you create inflation-linked cash, that's the end of the risk line.'
As described by USDi Partners LLC in a statement, the token will have as much purchasing power as the dollar did in December 2024. USDi will mint and burn the coin at its stated value, which, like TIPS principal, will be a function of that day's CPI.
While the government publishes CPI only once a month, it interpolates daily values that TIPS investors use to calculate accrued interest. CPI values determine TIPS and USDi index values with a two-month lag, meaning that the December CPI maps to March 1, and values have been published through May 31. The April 15 value of USDi is calculated by dividing that day's CPI — interpolated between the January and February monthly values — by the December CPI, which will always be the denominator in the equation.
It's different in that sense from stablecoins whose value is pegged to the dollar — of which there are dozens, with combined market value exceeding $200 billion. Initially they were used primarily as a conduit for trading other cryptocurrencies. Newer tokens have been created for use as collateral.
'It's a coin that is stable in real space,' Ashton says. Real, as in the real GDP figures that measure US economic growth, means adjusted for inflation.
The inspiration for the product comes from Chile's unidad de fomento, an accounting unit indexed to the country's price level since 1967. Used in contracts to insulate the sums involved from inflation, the UF is a non-circulating currency.
USDi, by contrast, will be backed by a reserve fund that Ashton will manage in parallel to the Enduring US Inflation Tracking fund he's been running for accredited investors since October 2021. The fund holds TIPS, regular US Treasury debt, foreign exchange and commodity futures and options. It doesn't use leverage.
The fund, administered by Trident Fund Management, returned an annualized 4.48% over the three years ended in March, with a median monthly return exceeding the CPI by 15 basis points, according to Ashton.
In contrast to algorithmic tokens, whose value depends on the assets that back them, USDi's reserve fund isn't staked to a blockchain, and the value of the coin is unrelated to how the assets perform, Ashton said. Rather, the coin is a primary obligation of USDi Partners, whose other assets would be available in the event that everyone cashed out and the reserve fund assets were exhausted, he said.
'The value here is derived from real-world assets earning real-world returns, not from the blockchain itself,' he said. Nor is the value of the coin tied to value of the assets, rather, 'it depends on the exogenous march of CPI.'
As a practical matter, that means the backers will mint or burn USDi at its daily value, less a transaction fee between zero and 1 basis point depending on size. That will be true regardless of the coin's market capitalization, which will have no initial minimum.
USDi Partners will mint and burn coins for institutions in exchange for dollars. The token will be available to accredited investors from approved market-making firms, which haven't been named yet, that are able to mint and burn it directly. On those platforms USDi will be exchangeable for USDC, the dollar stablecoin managed by Circle Internet Financial Group. It will trade on the Ethereum blockchain.
Ashton's partner in the venture is Andrew Fately, who began a four-decade career in foreign exchange options in the early 1980s. It included long stints at Lehman Brothers and Barclays, advising corporate clients on use of options to hedge their cash flows.
USDi is a comparable project in the sense that it 'is kind of like an exchange rate,' Fately said. 'The exchange rate in your life is time-based. At any given point in time you estimate as your base rate, as prices rise, your personal exchange rate is devaluing.'
Ashton says USDi has the potential to solve a problem he's been obsessed with since at least 2004, when as head of inflation derivatives at Barclays he presented at a conference a way in which TIPS could be disaggregated such that investors could buy inflation protection against a subset of the CPI they were most exposed to, as opposed to the entire index.
For example, one could theoretically buy protection against inflation in medical care or college tuition. It never happened because there wasn't enough demand for the other pieces of the CPI basket.
In traditional finance, Ashton said, 'you have to be able to sell all the pieces.' In crypto, if USDi is split into all the components of the CPI, and their combined price is less than than the coin's value, 'we'll take them and give you USDi back. Joint arbitrage limits how ridiculous the price can get.'
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