<strong>Is USDC the Most Promising Regulatory-compliant Stablecoin?</strong>

The cryptocurrency space has its share of bad actors. This is one of the reasons a lot of investors are having second thoughts about dipping their toes in digital assets. Circle’s USDC stablecoin is being marketed as one of the most trustworthy and regulatory-compliant stablecoins available.  Will it deliver its promises or just take users for a ride?

Circle has released its first annual “State of USDC Economy” Report.  It highlighted Circle’s achievements in the cryptocurrency space, more specifically how USDC has become the 2^nd largest stablecoin.  The report boasted that USDC is always redeemable 1:1 to the US dollar, a not-so-subtle reminder that not all stablecoins are created equal.

Why is the USDC Stablecoin Redeemable 1:1?

Circle has been managing the USDC reserve, which backs the USDC digital currency, since its introduction in 2018. The reserve guarantees that USDC can be exchanged for U.S. dollars at a 1:1 ratio at any time. Over $213 billion worth of USDC has been exchanged for U.S. dollars since its launch up until December 2022. To keep its promise, Circle has been operating USDC with several key principles in mind.

• Keep USDC structurally safe – Approximately 80% of USDC reserve is held in 3-month US treasuries, which are considered to be one of the most liquid assets in the world.  The remaining 20% are kept in cash in eight US-regulated banks.  The company is also making sure not to comingle USDC’s reserves with their operational funds.

• Be transparent about USDC and seek independent oversight – Circle has a US state money transmission license and is also registered as a money services business (MSB) with the US Department of Treasury.  Being registered with the Department of Treasury means that Circle complies with know your customer (KYC), anti-money laundering (AML), and countering the financing of terrorism (CFT) requirements.  The company also has an E-Money issuer license from the UK Financial Conduct Authority (FCA).
  • Circle also publishes a monthly attestation from a leading auditing firm, Grant Thorton.  This independent report confirms that there are enough dollar-denominated reserves to cover the USDC in circulation.

• Build a resilient and world-class approach to risk & treasury management – Circle has a team of experienced financial experts who have developed financial control infrastructure that adheres to the standards of U.S. public companies and regulated financial institutions. Their treasury infrastructure is described as robust enough to handle the demands of a growing digital economy, with automated 24/7 minting and redeeming of USDC through the Circle Account and API calls.

USDC and Circle’s Approach to Compliance

Circle says that they are serious about anti-money laundering (AML) and countering the financing of terrorism (CFT) compliance.  This is seen as a way to protect customers and build trust, leading to the mainstream adoption of cryptocurrencies and public blockchain-based payments. To achieve this the company has launched two initiatives.

• Travel Rule Universal Solution Technology (TRUST) ­­– TRUST is a solution initiated by the digital industry to comply with Travel Rule. The Travel Rule is a guideline set by the Financial Action Task Force (FATF) that requires virtual assets service providers (VASPs) such as cryptocurrency exchanges to collect and share certain information about their customers’ transactions to prevent money laundering and terrorist financing.
  • TRUST is intended to provide a standardized and automated way for VASPs to comply with the Travel Rule and share information about their customers’ transactions in a secure, private, and compliant manner.  For added security, customer information is not stored centrally to avoid being targeted by attacks.

• Verite – Circle is a launch parted of Verite.  Verite means truth in French, which is an appropriate description for the project.  It is a framework that allows users to prove their identity on the Web3 platform without compromising their personal information. It is open-source and enables web apps, mobile apps, and smart contracts to verify the identity of their users through the use of Verite credentials.  This is done without the need to access sensitive information.

Have We Found a Solid Stablecoin?

The crypto industry is still reeling from a lot of bad news from 2022 and investors are still feeling the impact of the collapse of Terra (Luna) and its stablecoin TerraUSD (UST).   Add into the mix the FUD regarding Tether’s (USDT) reserves and the fall of FTX.   With all of these events, it is understandable why investors are looking for a semblance of stability and regulatory compliance from digital assets.

Circle’s USDC stablecoin looks good on paper.  Its reserves are audited by a reputable third party and are theoretically liquid.  Its compliance with pertinent regulations and laws is admirable but raises the question if it still upholds crypto’s original goal of being free from government or central banking intervention.  One example is how Circle handled Tornado Cash.

USDC got to be the second-largest stablecoin because of all the innovations, regulatory compliance, and transparency.  This is something customers are looking for.  So will USDC continue to grow and stay true to being “stable”?  Who knows?  We can only wait and see.

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Image from Unplash