Author: Jay Yu Source: stanfordblockchain Translation: Shan Ouba, Golden Finance
Interview Guest: Heath Tarbert – Circle Internet Finance Company
Note: Heath Tarbert is Circle’s Chief Legal Officer and Head of Corporate Affairs. He has served as Chairman of the U.S. Commodity Futures Trading Commission (CFTC) and Assistant Secretary of the U.S. Treasury Department.
This article is an in-depth exploration of the discussions and opinions of Jay Yu, Stanford Blockchain Club, in an interview conducted in June 2024. Full Video: https://youtu.be/r289H_4kRxA
Today, stablecoins have become a staple in the cryptocurrency industry, combining the reliability of the U.S. dollar as a store of value with the tradability and ease of use of blockchain tokens. This includes USDC, Circle’s flagship product, one of the most widely adopted stablecoins, and the sixth largest cryptocurrency token by market cap.
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 currently face, and what all of this means for the digital future of the dollar.
At its core, USDC solves a very simple problem: how do you buy digital assets with dollars? Before stablecoins, the solution was to move fiat dollars from the traditional banking system to cryptocurrency exchanges, which is often a slow, cumbersome, and expensive process. USDC solves this “onboarding” problem by creating a “digital dollar”, a programmable, tokenized representation of the U.S. dollar that is backed 1:1 by fiat cash and cash equivalents.
Since its inception in 2018, USDC has grown to become one of the leading stablecoins in the crypto industry. Perhaps the key difference between USDC and other major stablecoins is its emphasis on trust and transparency throughout the issuance process. Unlike other stablecoin providers, which are often based overseas and unregulated, Circle is a wholly-owned U.S. company that operates in the United States and issues these “digital dollars.” Every month, USDC’s reserve assets are independently certified by the Big Four accounting firms, and Circle has a public dashboard where anyone can view the composition of USDC’s reserves in real time. For example, as of August 8, 2024, Circle’s dashboard records $34.5 billion worth of USDC in circulation.
So, how are Circle’s USDC tokens issued and redeemed? Direct issuance and redemption of USDC is handled through “Circle Mint,” an application programmable interface (API) for institutional traders, fintechs, exchanges, and other businesses. To receive any amount of USDC, Circle Mint customers need to initiate a fiat transfer of that amount to Circle’s USDC reserve account through its API, and Circle will then issue an equivalent amount of USDC to the customer’s Circle Mint account. Similarly, when a Circle Mint customer requests a fiat redemption of USDC, Circle will send that USDC to a “destruction address” and transfer the dollars to the business’s associated bank account when a “destruction event” occurs.
The asset management process is also designed to promote trust by leveraging the expertise and transparency of traditional asset managers. Of USDC's $34.5 billion in existing reserves, $4.5 billion is held at the Reserve Bank, and the remaining $30.1 billion is held in the Circle Reserve Fund, an SEC-registered government money market fund managed by BlackRock with a 7-day SEC yield of 5.29%.
Fiat-backed stablecoins like USDC stand in stark contrast to the traditional fractional banking system. While most dollars in banks are backed only by the bank's loan portfolio (which is often composed of relatively illiquid and risky assets), each "dollar" of USDC is backed by an equal 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 environment. By providing a secure, reliable, and innovative infrastructure framework for the "digital dollar," Circle aims to reimagine one of the most important assets in the financial world.
Of course, the real value of a stablecoin lies in its use. No matter how well-designed or transparent the product is, the true test of a stablecoin lies in its adoption in everyday use cases - both in a blockchain environment and in traditional payment channels.
Stablecoin transaction volume in DeFi
Circle's USDC is still the world's largest regulated digital dollar and natively supports 16 different blockchains, among which it has been widely used as the preferred stablecoin for DeFi protocols. Among them, Solana and Ethereum have the largest transaction volumes, and the main use cases are 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).
The interoperability mechanism in CCTP is very 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. To transfer USDC from one chain to another, such as from Ethereum to Solana, there are three main steps:
First, USDC is burned on the source chain Ethereum.
The user then obtains a signed proof of the burn from Circle, which serves as a receipt for this “burn event.”
Circle uses this proof to authorize the minting of USDC on Solana.
One of the advantages of this burn and mint mechanism is that it allows compatibility across blockchains running different virtual machines - such as Ethereum’s EVM and Solana’s SVM, thereby supporting 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 that its applications extend beyond crypto trading and DeFi products. Traditionally, money has three main functions: (1) as a store of value, (2) as a unit of account, and (3) as a medium of exchange. In the real world, all three of USDC’s monetary functions are gaining adoption.
As a “store of value,” USDC becomes a natural solution for people in developing countries who don’t have reliable access to U.S. dollars or dollar-denominated bank accounts. In Argentina, where annual inflation has soared to over 200%, stablecoins have become the primary way for citizens to store value. In 2023, 60% of cryptocurrency purchases in Argentina were in dollar-denominated stablecoins such as USDC, and the country ranked 15th in the world in terms of cryptocurrency adoption. In December 2023, Circle also announced a partnership with Brazil’s Nubank to provide its 85 million customers with access to a “digital dollar.”
As a “unit of account,” USDC has also made great strides in the past few years, as Circle has conducted extensive pilots with Visa and Mastercard, two of the world’s largest payment processors. For example, Visa has been working with Crypto.com since 2021 to pilot the use of USDC as a settlement mechanism, and in 2023, Visa announced that it would work with new merchant acquirers Worldpay and Nuvei and leverage the Solana blockchain to increase support for USDC settlement. Similarly, in 2021, Mastercard announced that it would provide cryptocurrency companies with the ability to launch branded card products that are settled in stablecoins such as USDC. As a "medium of exchange," USDC is currently available at any Visa terminal through the Coinbase Visa card. Launched in 2020 for U.S. consumers, the debit card allows consumers to use USDC directly at any Visa terminal, providing a fiat-like payment experience while earning cryptocurrency rewards.
Another example of using USDC as a "medium of exchange" is the Singapore-based Grab app, a Southeast Asian ride-hailing, food delivery, and grocery service super app 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 vouchers. Today, consumers can use USDC on Ethereum and Solana as a means of recharging their Grab wallets.
So, we see that today USDC is gaining more and more support and integrating with traditional payment channels, merging the Internet financial system with traditional financial services. But as a means of payment, how do stablecoins compare to existing digital payment systems such as the Automated Clearing House (ACH)?
In many existing systems, such as ACH, funds and information are moved separately in centralized ledgers. If Alice makes a transaction to Bob via ACH or credit card, the transaction will first be marked as "pending" and will not be completed until up to a few days later. This is because at the time of the transaction, the system only sends a "message" that the transaction has occurred, and does not move the funds themselves. The funds are credited asynchronously, sometimes with a delay of several days.
A key advantage of stablecoin payments over these traditional systems is that the funds and information flow simultaneously. Therefore, when Alice makes a stablecoin transaction to Bob, Bob receives the full amount of funds the moment the transaction information is sent, just like a cash payment. In this way, stablecoins as a payment mechanism represent a technological leap forward over many existing settlement solutions and are better suited to play the role of the "digital dollar" in the future.
Like any emerging technology, stablecoins raise a number of legal and regulatory issues. As stablecoins such as USDC move into the mainstream, a key concern is that they could become a tool for malicious actors to conduct money laundering, terrorist financing, and evade sanctions. This is particularly important as the connection between traditional financial services and stablecoins matures over time to create a new internet-based financial system; a focus on improving regulatory compliance for stablecoin products is needed.
In this article, we have highlighted how Circle is committed to making USDC a regulated, transparent, stable currency, 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 U.S. users of Circle Mint are subject to anti-money laundering and know-your-customer regulations, such as the Patriot Act.
However, while it is necessary to introduce compliance to prevent malicious actors from abusing stablecoins such as USDC, this regulation should be more sophisticated and fine-tuned to protect the interests of everyday consumers who want to use USDC; creating a regulatory system that excludes everyday consumers, especially those who have been marginalized by the existing financial system, is not in the best interest of the United States.
Today, the two main regulators attempting to regulate stablecoins in the United States—the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC)—were established long before the invention of the modern internet, let alone digital assets such as cryptocurrencies and stablecoins. Today’s regulators are still using tools from more than 90 years ago, and while some guidelines are still useful in certain situations, regulators need to consider particularly carefully how to apply existing rules to this new industry and develop new rules to effectively regulate new activities based on blockchain technology innovations.
While the blockchain industry can make some technological innovations, such as decentralized digital identity systems, which make it easier to balance end-user privacy needs and regulatory requirements, this alone is not enough to fill this regulatory gap. Congress should act to increase regulatory clarity around stablecoins and digital assets as a whole, and new legislation such as the draft Stablecoin Transparency Act represents a step in the right direction.
Several other jurisdictions, including the European Union, have gone further than the United States in this regard. Recently, the European Union introduced the Markets in Crypto-Assets Regulation (MiCA), which will be fully implemented in December 2024. The core innovation of MiCA is that it seeks to create an entirely new regulatory framework for digital assets, including provisions such as mandatory liquid reserves for stablecoin issuers, restrictions on non-euro-denominated stablecoins, and a unified authorization system for the EU's 450 million citizens. MiCA represents a major step forward in increasing regulatory clarity for stablecoin and digital asset regulation, and Circle's stablecoin is one of the first global stablecoins to comply with MiCA regulations. Based on its work in complying with MiCa, Circle's products are well-positioned to gain adoption in the EU and become the leading compliant stablecoin.
The largest foreign holder of U.S. Treasuries.
Therefore, the U.S. Congress has a strong incentive to take action on stablecoin legislation. Regulated, dollar-denominated stablecoins like USDC can greatly advance U.S. interests in the digital asset space. USDC’s reserve mandate means that there will always be demand for U.S. Treasuries. As of June 2024, stablecoins are the 18th largest holder of U.S. debt, holding more Treasuries than South Korea or Germany. This number will only increase as demand for stablecoins and digital assets grows. In other words, demand for dollar-denominated stablecoins translates directly into demand for dollars and U.S. debt. Congress must therefore increase regulatory clarity in the digital asset space to further strengthen the power of the dollar in the digital age.
Since their inception a few years ago, stablecoins like USDC have come a long way to become one of the most compelling use cases for blockchain technology. The core idea of stablecoins is to bring the interoperability, composability, and accessibility of the Internet to traditional monetary institutions, and USDC is leading the way in building a secure and transparent “digital dollar.”
In the coming years, as stablecoin products, adoption, and regulation mature and develop, we can expect millions of businesses and individuals to adopt new open standards for financial transactions. In this sense, Circle's mission is to realize the unfinished promise of the Internet - to bring the openness and transparency of the Internet to the monetary field and ultimately build an Internet financial system.
New EU regulations may soon force decentralized finance (DeFi) protocols to make difficult decisions, largely due to the preference of many DeFi protocols to have centralized front-ends and intermediaries.
JinseFinanceIt will implement MiCA in December 2025, six months ahead of the deadline.
ClementThe site will solely provide fiat withdrawals and no other services.
CryptoSlateUsers will be able to easily transition from the cryptocurrency world into the fiat world and make purchases or withdraw cash from ATMs using this card.
FinboldLast December, Eva Kaili, who was one of the EU Parliament's vice-presidents, was arrested and charged with corruption related to illicit donations from Qatar.
BeincryptoOn October 10, 2022, the European Parliament Committee approved The MiCA bill and the European Parliament also voted on the TFR.
Huobi ResearchCommissioner Mairead McGuinness has urged US lawmakers to create comprehensive new regulations.
BeincryptoThe Markets in Crypto-Assets framework stands to get in the way of Circle's Euro Coin and other digital assets. Policymakers should revise the proposal.
OthersMairead McGuinness said that she planned to discuss a compromise through the MiCA proposal currently under review in the EU.
CointelegraphRussian citizens or residents will no longer be able to access BitMEX services from the European Union after July 11, 2022.
Cointelegraph