(Bloomberg) -- Ethena, a crypto project whose dollar-pegged coin has ballooned to become one of the biggest of its kind since its launch a year ago, has raised $100 million to help fund the introduction of a similar token aimed at traditional financial institutions.
The fundraising, which hasn’t been previously reported, was completed in December and drew investors including Franklin Templeton and F-Prime Capital, the venture capital firm affiliated with Fidelity Investments, according to a person with knowledge of the matter.
Ethena runs two cryptocurrencies: ENA, which is a so-called governance token that gives owners a say in the project; and USDe, which is marketed as a “synthetic dollar” and currently offers holders a 9% yield. USDe’s circulation has swelled to almost $6 billion as booming crypto prices allowed Ethena to offer returns that at one point reached 60%.
A foundation supporting the project sold ENA tokens to the investors at an average price of just under 40 US cents each, said the person, who asked not to be identified discussing private information. ENA’s price soared to around $1.30 in mid-December but has since crashed almost 70%, according to CoinGecko data.
Beyond big-name financial backers, the project has established connections in the US halls of power. World Liberty Financial, a crypto project promoted by US President Donald Trump and his sons, said in December that it had entered into a strategic partnership with Ethena Labs, the startup behind the project. Trump campaigned as a crypto advocate, and launched his own memecoin just before returning to the White House.
Ethena Labs declined to comment on the token sale. Dragonfly Capital Partners, Polychain Capital LP and Pantera Capital Management LP, three of the biggest crypto venture capital funds, also participated in the funding round, people with knowledge of the matter said.
A spokesperson for F-Prime declined to comment. Franklin Templeton didn’t respond to a request for comment. Dragonfly, Pantera and Polychain declined to comment.
Yield-Generating Mechanism
The USDe token is backed by a reserve of digital assets, including stablecoins like USDT and USDC, by far the biggest such cryptocurrencies. That’s a crucial difference from USDT and USDC, which are mainly backed by highly liquid and safe assets like US Treasury bills. Crypto data trackers CoinGecko and CoinMarketCap classify USDe as a stablecoin.
Layered on top of that is more complex financial engineering intended to generate yield for holders, something USDe’s biggest competitors don’t do.
Ethena uses a version of the basis trade, which exploits price discrepancies in spot and futures markets, to generate yield. When crypto markets are booming and funding rates — the interest paid by bullish traders to take on leverage for futures bets — are high, the mechanism Ethena relies on can translate into sky-high yields.
That strategy, however, could be tested in a bear market.
(For more on how USDe works, read: ‘Tokenized Hedge Fund’ Rakes in Crypto Billions With 37% Yield)
“Risks arise for Ethena when cryptocurrency markets experience sharp price corrections and the funding rate becomes negative as traders liquidate their long positions and others want to open short positions,” researchers at CryptoQuant said in an April report. “In this case, traders with open short positions (the case of Ethena) are required to pay to traders with open long positions.”
Such a development could put pressure on the reserve fund Ethena maintains to underpin the stablecoin, according to the CryptoQuant report.
Institutional Focus
In a January blog post, Ethena Labs founder Guy Young said the project would soon roll out iUSDe, a product tailored for regulated financial institutions.
That token will come with certain transfer restrictions to allow traditional financial firms to use it. Young said Ethena’s “singular focus” for the first quarter of the year is to work with finance distribution partners to enable their clients to access iUSDe. The new token will “enable traditional finance an efficient entry into the product without ever needing to touch crypto rails,” Young wrote.
Stablecoins are becoming a key bridge between the worlds of crypto — where they’ve been used for years — and traditional finance, where companies like Standard Chartered Plc are making forays into the asset class. Tether’s USDT is backed by more than $140 billion in dollar-denominated assets managed in part by Cantor Fitzgerald, whose founder Howard Lutnick is Trump’s commerce secretary.
In January, Trump signed an executive order to protect the greenback, “including through actions to promote the development and growth of lawful and legitimate dollar-backed stablecoins worldwide.”
Ethena also plans to use the proceeds of the token sale to invest in launching its own blockchain, the person familiar with its operations said.
--With assistance from Emily Nicolle.