‘The banking pendulum is beginning to swing’: Circle plans to become a national digital currency bank

“Establishing national regulatory standards for dollar digital currencies is crucial to enabling the potential of digital currencies in the real economy, including standards for reserve management and composition,” said Allaire.

The news of Circle’s intention to become a bank comes just a month after the company filed an S-4 with the SEC to go public on the New York Stock Exchange through a merger with Concord Acquisition Corp., a publicly traded SPAC. The deal valued the firm at $4.5 billion.

While a number of crypto-native firms including Paxos and Anchorage Digital have already been issued a conditional banking charter by the OCC, Circle would be the first in the industry to become a full-reserve commercial bank, if its application is approved.

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Fractional-reserve banking, practiced by most commercial banks in the U.S., requires only a fraction of each depositor’s funds to be backed by actual cash. In contrast, full-reserve banking requires a bank to keep the full amount of each deposit in cash and ready for withdrawal.

The transition to a full-reserve bank would subject Circle to much greater regulatory oversight, as it would be expected to submit detailed reports of its operations and the nature of its reserves to government agencies. 

However, this may also place Circle in a unique position to act as a link between traditional and decentralized finance. It could help the firm legitimize itself to the traditional financial world without straying from its roots in the crypto world.

“With this development, the banking pendulum is beginning to swing away from ‘yield at all costs’, which encourages riskier behavior by banks and lenders, towards ‘pragmatism and conservatism’, which encourages preservation of capital entrusted to the institution,” said George Kaloudis, research analyst at CoinDesk. “This should introduce more transparency to banking in general.”

Kaloudis believes Circle’s commitment to more conventional lending practices would expand the margin of safety that traditional finance companies associate with crypto-native businesses. This could help bring about broader institutional interest in the entire cryptocurrency ecosystem.

“If the issuer of a major stablecoin becomes a federally regulated bank, a lot of the haze surrounding ‘shadowy super coders’ would naturally shift towards less skepticism and greater acceptance,” he said.

The high degree of regulatory oversight on Circle’s activities would bring more transparency to the emerging stablecoin asset category, possibly increasing investor interest and speeding up institutional adoption of USDC.

“Other U.S.-based stablecoin issuers may well have to consider a similar move if we discover that the Circle Bank has an unassailable advantage to gathering assets into USDC, at the expense of much slower growth for other stablecoins,” said Asi De Silva, managing partner at investment advisory firm RockDen Advisors.

Circle’s move to become a publicly traded company could also help legitimize the stablecoin industry in the eyes of investors and regulators. Even if the banking license doesn’t come through, becoming a publicly listed company would lead to much greater scrutiny and improved reporting standards. 

“Post-listing, Circle will have to adhere to SEC rules and regulations, which will be a notable improvement for USDC owners. In my view, this will also influence how the SEC regulates the rest of the digital asset economy,” said De Silva. “If the SEC is comfortable with a stablecoin issuer going public, how much longer can it keep bringing up a lack of investor protection to turn down crypto ETF applications?”