FDUSD stablecoin drops to $0.87 amid insolvency claims by Justin Sun

The First Digital US dollar-pegged stablecoin (FDUSD) experienced a sharp depeg on April 2, dropping to $0.87 following allegations of insolvency by Tron (CRYPTO:TRX) founder Justin Sun.

Sun claimed that First Digital, the issuer of FDUSD, was unable to fulfill redemptions, triggering panic in the market.

In response, First Digital denied the accusations, asserting that FDUSD remains fully backed and redeemable on a 1:1 basis with the US dollar.

"Every dollar backing FDUSD is secure, safe, and accounted for with US-backed Treasury Bills," the company stated.

First Digital also announced plans to take legal action against Sun, describing his statements as a "smear campaign" aimed at undermining competition.

The depeg led to a surge in trading volumes for FDUSD, with firms such as Wintermute reportedly purchasing the token at $0.90 and profiting as it moved closer to its peg.

The incident has reignited discussions around stablecoin transparency and the need for stronger proof-of-reserve mechanisms.

Proof-of-reserve audits often rely on cryptographic methods such as zero-knowledge proofs and Merkle Trees to verify that issuers hold sufficient reserves.

However, experts warn that these audits typically do not account for liabilities, leaving room for potential misrepresentation.

Tal Zackon, founder of Tres Finance, emphasised that traditional third-party audit reports only provide "snapshots" of reserves that can be manipulated or misinterpreted.

As stablecoins become more integrated into global finance, real-time proof-of-reserve tools may be necessary to maintain trust and stability.

Despite First Digital's assurances and FDUSD’s partial recovery, the event highlights vulnerabilities in the stablecoin market.

Regulatory scrutiny is expected to increase as authorities assess risks associated with stablecoin issuers and their financial disclosures.

For now, First Digital faces both market skepticism and legal challenges as it works to restore confidence in its operations.