Introduction

Stablecoins today are a staple of the crypto industry, combining the dollar’s reliability as a store of value with a blockchain token’s transactability and ease of use. Among these is USDC, Circle’s flagship product and one of the most widely adopted stablecoins, and the 6th largest crypto token by Market Cap [1].

In this article, we will discuss USDC’s unique features as a stablecoin product, its current adoption as a means of payment, and the regulatory landscape that USDC and other digital assets may face today, and what all this means for the digital future of the dollar.

Creating a Stablecoin of Trust and Transparency

At its core, USDC solves a very simple issue: how do you buy digital assets with dollars? Before the advent of stablecoins, the solution was to bridge over fiat dollars from the traditional banking system into cryptocurrency exchanges, often a slow, cumbersome, and expensive process. USDC addresses this “onramping” issue by creating a “digital dollar,” a programmable, tokenized representation of the US Dollar that is backed 1:1 by fiat cash and cash-equivalent assets [2].

Since its inception in 2018, USDC has grown to become one of the leading stablecoins in the crypto industry. Perhaps the key factor that distinguishes USDC from other major stablecoins is its emphasis on trust and transparency throughout the issuance process. Unlike other stablecoin providers, which are often based overseas and are not regulated, Circle is a wholly US-owned, US-operated company that issues these “digital dollars.” Every month, USDC’s reserve assets undergo an independent attestation by a Big Four accounting firm, and Circle has a public dashboard where anyone can view USDC’s reserves composition in real time [3]. For example, as of Aug 8, 2024, Circle’s dashboard records $34.5 billion dollars worth of USDC in circulation [4].

Circle’s Reserve Compositions, accessed Aug 8, 2024. Source [4].

So, how are Circle’s USDC tokens issued and redeemed from this fiat backing? The direct issuance and redemption of USDC are processed through “Circle Mint”, an Application Programmable Interface (API) for institutional traders, fintech firms, exchanges, and other corporate businesses. To receive USDC in any amount, a Circle Mint customer initiates a fiat transfer in that amount through its API to Circle’s USDC reserve account, and Circle issues the equivalent USDC to the customer’s Circle Mint account. Similarly, when a Circle Mint customer requests a fiat redemption for USDC, Circle will send this USDC to a “burn address,” and upon this “burn event,” will transfer USD to the business’ linked bank account [2].

The asset management process also aims to promote trust through leveraging the expertise and transparency of traditional asset managers. In USDC’s $34.5 billion current reserves [4], $4.5 billion is held at reserve banks, while the remaining $30.1 billion is held in the Circle Reserve Fund, a SEC-registered government money market fund managed by Blackrock that has a 5.29% 7-Day SEC yield [6].

Fiat-backed stablecoins like USDC stand in stark contrast to the traditional fractional banking system. Whereas most dollars in a bank are backed solely by the bank’s lending portfolio (which often comprises relatively illiquid and riskier assets), every “dollar” of USDC is backed by an equivalent amount of highly liquid cash and cash-equivalent USD assets. In this sense, Circle’s USDC paves the way for the future of the dollar in a digital setting. Through providing a secure, safe, and innovative infrastructure framework for “digital dollars,” Circle aims to reimagine one of the most important assets in the financial world.

Adoption of USDC From DeFi to TradFi

Of course, the true value of a stablecoin lies in its use. No matter how well-designed or how transparent the product is, the real test for a stablecoin is in its adoption in everyday use cases – both within blockchain contexts, as well as with traditional payment rails.

Dune Dashboard of Stablecoin Volume in DeFi [9]

Circle’s USDC remains the world’s largest regulated digital dollar and is natively supporting 16 different blockchains, where it has seen significant usage as a preferred stablecoin for use in DeFi protocols [16] [10]. Amongst these, the largest transaction volumes are on Solana and Ethereum, with the primary use cases being in trading, and other activities in the crypto ecosystem. To ensure compatibility between different supported blockchains, USDC has developed a native interoperability infrastructure for cross-chain transfers, called the Cross-Chain Transfer Protocol (CCTP) [11].

The interoperability mechanism in CCTP is quite similar to Circle Mint’s fiat-to-token infrastructure. Currently, CCTP supports 8 different chains, namely: Arbitrum, Avalanche, Base, Ethereum, Noble, OP Mainnet, Polygon PoS, Solana [11]. To transfer USDC from one chain to another, such as from Ethereum to Solana, there are three main steps:

1. First, USDC is burned on Ethereum, the source chain.
2. Then, the user fetches a signed attestation from Circle to this burn, which acts as a receipt to this “burn event”.
3. Circle uses this attestation to authorize the mint of USDC on Solana.

One of the advantages of this burn-and-mint mechanism is that it allows for compatibility across blockchains running different Virtual Machines – such as EVM for Ethereum and SVM for Solana, enabling use cases such as cross-chain swaps, deposits, and purchases in Decentralized Finance (DeFi) systems.

But perhaps the most exciting area of growth for USDC is in its adoption beyond just crypto transactions and DeFi products. Traditionally, money has three main functions: (1) as a store of value, (2) as a unit of account, (3) as a medium of exchange. USDC has seen growing adoption for all three functions of money in real-world settings.

As a “store of value,” USDC emerges as a natural solution for people in developing countries without reliable access to either US dollars or a dollar-denominated bank account. In Argentina, where the annual inflation rate surges above 200%, stablecoins have emerged as a major way for citizens to preserve their wealth [12]. In 2023, 60% of crypto purchases in Argentina were for dollar-denominated stablecoins such as USDC, and the country ranks 15th for crypto adoption in the world [12]. In December 2023, Circle also announced a partnership with Brazil’s Nubank to provide its 85 million customers with access to “digital dollars” [13].

As a “unit of account,” USDC has also advanced significantly over the past few years, as Circle has conducted extensive pilots with Visa and Mastercard, two of the biggest payment processors globally. For example, since 2021, Visa has partnered with Crypto.com to pilot using USDC as a settlement mechanism, and in 2023, Visa announced that it would roll out increased support for USDC settlement, with new merchant acquirers Worldpay and Nuvei and utilizing the Solana blockchain [14]. Similarly, in 2021, Mastercard announced that it would be offering crypto companies the ability to launch branded card offerings, settled with stablecoins such as USDC [15].

As a “medium of exchange,” USDC can be used today at any Visa terminal through the Coinbase Visa Card. Launched in 2020 for US consumers, this debit card allows consumers to directly spend USDC at any Visa terminal, providing a fiat-like payment experience while earning rewards in crypto [16].

Coinbase Visa Card, which allows clients to spend USDC at any Visa terminal. Source: Original Content.

Another example of USDC being used as a “medium of exchange” is the Singapore-based Grab app, a ride-hailing, food-delivery, and grocery services superapp in Southeast Asia with over 180 million users. In September 2023, Grab announced that they had partnered with Circle to create a web3 wallet that supports USDC payments and NFT government vouchers and food stamps [17]. Today, consumers can use USDC on Ethereum, and Solana as a means to top up their Grab wallet [18].

Thus, we see that USDC today is gaining increased support and integrations with traditional payment rails, merging an internet financial system with traditional financial services. But how do stablecoins compare as a means of payment to existing digital payment systems, such as Automated Clearinghouses (ACH)?

In many existing systems such as ACH, the money and the message moves separately across centralized ledgers [19]. If Alice makes a transaction to Bob via ACH or credit card, a transaction will first be labeled as “pending” for up to several days, before it becomes finalized. This is because at the moment of transaction, the system merely emits a “message” that a transaction occurred, without moving the money itself. The money is credited asynchronously, sometimes after a delay of several days.

A key advantage of stablecoin payments over these legacy systems is that the money and the message move at the same time. Thus, when Alice makes a stablecoin transaction to Bob, Bob receives the full amount of the money the instant the transaction message is emitted, just like a cash payment. In this way, stablecoins as a payment mechanism represent a technological leap over many existing settlement solutions, and are far more suited to play the role of a “digital dollar” in the future.

Legal and Regulatory Perspectives on Stablecoins

As with any emerging technology, stablecoins have raised many legal and regulatory questions. As stablecoins such as USDC make their way into the mainstream, one key issue is that they may become a tool for malicious actors to conduct money laundering, terrorism financing, and sanctions evasion. This is particularly important as the rails between traditional financial services and stablecoins mature over time to build a new Internet-based financial system; there needs to be a focus on advancing regulatory compliance for stablecoin products.

Throughout this piece, we’ve emphasized how Circle aims for USDC to serve as a regulated, transparent, stablecoin issued by an issuer that prioritizes regulatory compliance. As a regulated money transmitter, Circle complies with relevant FINCEN guidelines and state money transmitter laws, and all US-based users of Circle Mint are subject to anti-money laundering and know-your-customer regulations such as the Patriot Act [20].

But while it is necessary to introduce compliance to prevent abuse of stablecoins such as USDC by malicious actors, this regulation should be more sophisticated and fine-tuned to also protect the interests of everyday consumers that wish to use USDC; creating a regulatory system that shuts out everyday consumers - especially those already marginalized by the existing financial system - does not advance American interests.

Today, the two main regulatory bodies that are attempting to regulate stablecoins in the US – the Securities and Exchange Commision (SEC) and the Commodity Futures Trading Commission (CFTC) – were created far before the invention of the modern Internet, let alone digital assets such as cryptocurrencies and stablecoins. Regulators today are working with tools from over 90 years ago, and while some guidelines remain useful in certain cases, regulators need to be especially thoughtful on how to apply existing rules to this novel industry and create new rules to effectively regulate activities that are novel based on the innovations of blockchain technology.

Although the blockchain industry can make some technical innovations, such as decentralized digital identity systems, which make it easier to balance end-users’ demands for privacy with regulatory requirements, this alone will not be enough to fill this regulatory gap. It is up to Congress to act in order to increase regulatory transparency for both stablecoins and for digital assets at large, and new legislation such as the draft of the Stablecoin Transparency Act represent steps in the right direction [21].

In this regard, several other jurisdictions, including the European Union, are much farther ahead than the United States. Recently, the EU has introduced the Markets in Crypto-Assets Regulation (MiCA), which is set to be fully implemented by December 2024 [22]. The core innovation with MiCA is that it seeks to create a whole new regulatory framework built for digital assets, with provisions such as mandating liquid reserves for stablecoin issuers, limitations on non-euro denominated stablecoins, and a unified authorization regime for the EU’s 450 million citizens. MiCA represents a significant step in increasing regulatory clarity around both stablecoin and digital asset regulation [22], and Circle’s stablecoins are the first global stablecoins that are complaint under MiCA [23].Based on their work to comply with MiCa, Circle’s products are well-positioned to gain adoption in the EU as a leading compliant stablecoin.

Largest Foreign US Treasury Holders. Source [24].

Thus, there is a great incentive for the US Congress to act on stablecoin legislation. A regulated, dollar-denominated stablecoin such as USDC can greatly advance American interests in the digital asset space. USDC’s reserves mandate means that there will always be a natural demand for US Treasuries. As of June 2024, stablecoins are the 18th largest holder of US debt, holding more T-Bills than South Korea or Germany [24]. And as demand for stablecoins and digital assets grows, this number will only increase. In other words, demand for US-denominated stablecoins directly translates into demand for US dollars and US debt. Therefore, it is imperative that Congress increases regulatory clarity for the digital asset space, to further strengthen the power of the dollar in the digital age.

Conclusion

Stablecoins such as USDC have come a long way since their inception just a few years ago, emerging as one of blockchain technology’s most compelling use cases. The core idea of a stablecoin is to bring the interoperability, composability, and accessibility of the Internet to the legacy institutions of money, and USDC leads the way in building a safe and transparent “digital dollar.”

In the next few years, as stablecoin products, adoption, and regulation mature and develop, we can expect millions of businesses and people adopting a new open standard for financial transactions. In this sense, Circle’s mission is to fulfill the unfinished promise of the Internet – to bring the Internet’s openness and transparency to the realm of money to ultimately build an Internet financial system [25].

References

[1] Accessed June 23, 2024: https://coinmarketcap.com/currencies/usd-coin/?update=1719157889899

[2] https://www.circle.com/blog/an-overview-of-usdc-and-circles-stablecoin-infrastructure

[3] https://messari.io/project/usd-coin/profile

[4] https://www.circle.com/en/transparency

[5] https://www.circle.com/en/circle-mint#Institutional-Traders

[6] https://www.blackrock.com/cash/en-us/products/329365/

[7] https://www.reuters.com/business/crypto-firm-circle-reveals-33-bln-exposure-silicon-valley-bank-2023-03-11/

[8] https://www.federalregister.gov/agencies/federal-deposit-insurance-corporation

[9] https://dune.com/thb3100/stablecoin-dashboard

[10] https://www.circle.com/en/multi-chain-usdc

[11] https://developers.circle.com/stablecoins/docs/cctp-getting-started

[12] https://www.coindesk.com/markets/2024/02/12/tether-and-circle-stablecoin-purchases-dominate-in-argentina/

[13] https://www.circle.com/en/pressroom/circle-and-nubank-partner-to-increase-digital-dollar-access-in-brazil

[14] https://usa.visa.com/about-visa/newsroom/press-releases.releaseId.19881.html

[15] https://www.mastercard.com/news/press/2021/july/mastercard-creates-simplified-payments-card-offering-for-cryptocurrency-companies/

[16] https://cointelegraph.com/news/usdc-usdt-stablecoin-dominance

[17] https://www.circle.com/en/case-studies/grab

[18] https://x.com/jerallaire/status/1769696996326068259

[19] https://www.investopedia.com/ach-transfers-what-are-they-and-how-do-they-work-4590120

[20] See Sections 6-7 of USDC Terms: https://www.circle.com/en/legal/usdc-terms

[21] Stablecoin Transparency Act: https://www.congress.gov/bill/117th-congress/senate-bill/3970/all-info

[22] Summary of MiCA by Coindesk: https://www.coindesk.com/learn/mica-eus-comprehensive-new-crypto-regulation-explained/

[23] https://www.circle.com/en/eurc

[24] https://www.coindesk.com/markets/2024/06/20/stablecoin-issuers-now-18th-largest-holder-of-us-debt/

[25] https://www.circle.com/en/reports/state-of-the-usdc-economy

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