The ups and downs of Circle’s USDC stablecoin

Circle, the issuer of USDC and EUROC, intends to become a full-reserve commercial bank. It's forming strategic partnerships to expand its payments network that uses blockchain infrastructure. However, stuck between a rock and a hard place, it operates within a cryptocurrency industry that lacks regulatory clarity. And to add to its challenges, the Fed’s investigation into stablecoins and exploration of CBDCs is not making the journey any easier.

Recently, Circle announced a partnership with Robinhood, the investment app, to launch a Learn and Earn program – a crypto adoption-driving model that provides incentives to users. Circle benefits by onboarding more users, while Robinhood leverages its payment infrastructure to power its Web3 products.

“The launch of USDC on a celebrated consumer platform like Robinhood reinforces the role USDC plays in greater payments and commerce use cases,” said Jeremy Allaire, co-founder and CEO of Circle.

Still recovering from the GameStop backlash, Robinhood benefits from the partnership by avoiding exposing its customers to the volatility in the cryptocurrency market. Secondly, USDC is a well-respected brand in the crypto market, and has gained particular significance following Terra's UST stablecoin collapse – which wiped out $60 billion from the industry seemingly overnight. 

When $60 billion worth of consumer investments go down the drain, even anarchists want government regulators to send the perpetrators to prison. This crypto calamity presented the perfect opportunity for regulators to launch into the scrutiny of stablecoins and advance their exploration of CBDCs.   

However, regulators were first alerted to the notion of a stable cryptocurrency acting as cash when Facebook proposed to launch Libra in 2017. “Of course, Facebook's proposal of Libra was what captivated or prompted regulators to focus on this,” said Timothy Massad, former chair of the CFTC, during an interview with Bloomberg.

As for the Fed's scrutiny of stablecoins, there are two aspects to consider. The first is that the rapid growth and usage of stablecoins demonstrated breakthrough innovation in payments that could impact the banking system. Most banks make money by processing payment transactions through legacy channels that are full of friction and require a lot of fees. Stablecoins' use of blockchain technology bypasses friction and significantly reduces fees. 

The second is that most stablecoins reserve collateral in multiple FDIC-insured banks, which means that if anything goes wrong – which is often the case – then they pose a broader systematic risk to financial stability.

Circle is working with regulators to develop the regulatory framework surrounding stablecoins. It does not pose as a challenger bank; instead, its website states that it is on a “mission to raise global economic prosperity through the frictionless exchange of value.” As for posing a systematic risk, Circle responded to the Basel Committee on Banking Supervision’s second consultation on the prudential treatment of crypto-asset exposures: “Fundamentally, not all stablecoins are alike, and some convey inherently less risk than others."

Simply put, stablecoin issuers have different business models and objectives. Therefore, they use various means to achieve their goals. Classifying all stablecoins under one umbrella doesn’t do them justice.

Circle’s business objective is to become a global commercial bank – it’s currently licensed in various jurisdictions, and adheres to regulations. The company wants the USDC stablecoin to fall under a new classification category called tokenized cash. Tokenized cash is a term coined to describe "tokenized versions of cash and cash equivalents." And cash and cash equivalents are classified and regulated as low-risk assets.

Circle has also been very involved in the CBDC discussions with regulators and submitted a response to the Federal Reserve’s CBDC discussion paper. In summary, it argues that private-sector stablecoins already provide the benefits of a CBDC. In addition, it raises questions about privacy, consumer protection, and prospects of social credit scoring. Furthermore, it argues that a CBDC would stifle innovation, set limiting government standards for issuing stablecoins, and add a layer of costs to the private sector.

“The Federal Reserve’s discussion paper does not expand on the potential adaptation costs associated with implementing a CBDC, including for businesses and individuals that would need to accommodate transactions involving a CBDC,” wrote Circle.

As if engaging in discussions with politicians and policymakers at Capitol Hill was not enough, other crypto industry players are giving Circle a run for its money. Last month, Binance, the largest crypto exchange, disabled USDC trading pairs. Moreover, it automatically converted all USDC balances to Binance USD (BUSD), Binance's version of a stablecoin.

Binance cites enhanced liquidity and capital efficiency as the main reasons for the decision. But its negative impact on USDC’s market capitalization is evident. Since Binance disabled USDC trading pairs and auto-converted USDC pairs to BUSD, BUSD’s market cap has gained 12% while USDC’s has lost 12%, according to a Decrypt article.

Circle's Jeremy Allaire shared his perspective on the matter in a Twitter thread. He suggested that the event would likely lead to more USDC flowing to Binance, and argued that Binance's move to auto-convert currency without the permission of users “probably wouldn’t fly for a regulated market in the US.”

Allaire concluded that unless Binance convinces everyone to use BUSD – highly unlikely given the $570 million hack recently experienced by the Binance Smart Chain – Circle’s long-term strategy to remain a neutral market infrastructure was still in play.

Circle is charting a new course as it continues its mission to reduce payment friction and provide global on- and off-ramps between legacy banking and the cryptocurrency market. The above recap of its recent challenges reverberates the saying that “many are called but few are chosen.”