Original author: STANFORD BLOCKCHAIN CLUB
Original translation: TechFlow
* Note: This article comes from Stanford Blockchain Review. TechFlow is a partner of Stanford Blockchain Review and is exclusively authorized to compile and reprint it.
An interview was conducted with Heath Tarbert, Circle’s Chief Legal Officer and Head of Corporate Affairs, former Chairman of the Commodity Futures Trading Commission (CFTC), and former Assistant Secretary of the U.S. Treasury Department.
This article is a long-form exploration of discussions and ideas from an interview with Jay Yu of the Stanford Blockchain Club in June 2024. Click here to watch the full video .
introduction
Today, stablecoins are an important part of the crypto industry, combining the reliability of the U.S. dollar as a store of value with the tradability and ease of use of blockchain tokens. Among them, USDC is Circle's flagship product and one of the most widely adopted stablecoins, and the sixth largest crypto token by market capitalization.
In this article, we will discuss the unique characteristics of USDC as a stablecoin product, its current adoption as a means of payment, the regulatory environment that USDC and other digital assets may face, and what all of this means for the future of the digital dollar.
Creating a stablecoin with trust and transparency
At its core, USDC solves a very simple problem: how do you buy digital assets with dollars? Before stablecoins, the solution was to transfer fiat dollars from the traditional banking system to cryptocurrency exchanges, which is often a slow, cumbersome, and expensive process. USDC solves this "on-chain" 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-equivalent assets.
Since its inception in 2018, USDC has grown into one of the crypto industry’s leading stablecoins. Perhaps the key factor that sets USDC apart from other major stablecoins is its emphasis on trust and transparency in its issuance process. Unlike other stablecoin providers, which are often based overseas and unregulated, Circle is a fully U.S.-owned and operated company that issues these “digital dollars.” Every month, USDC’s reserve assets are independently audited by a Big Four accounting firm, and Circle also features a public dashboard where anyone can view USDC’s reserve composition in real time. For example, as of August 8, 2024, Circle’s dashboard recorded $34.5 billion in USDC in circulation.
Circle’s reserve composition, accessed on August 8, 2024
So how are Circle’s USDC tokens issued and redeemed from fiat backing? Direct issuance and redemption of USDC is handled through “Circle Mint,” an application programming interface (API) for institutional traders, fintechs, exchanges, and other businesses. To receive any amount of USDC, Circle Mint customers initiate a fiat transfer of the corresponding amount to Circle’s USDC reserve account through its API, and Circle issues an equivalent amount of USDC to the customer’s Circle Mint account. Similarly, when a Circle Mint customer requests to redeem USDC for fiat currency, Circle sends those USDC to a “destruction address,” and after this “destruction event” occurs, the U.S. dollars are transferred to the business’s associated bank account.
The asset management process is similarly designed to foster trust by leveraging the expertise and transparency of traditional asset managers. Of USDC’s current $34.5 billion in reserves, $4.5 billion is held at the Reserve Bank, while 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 parts of the traditional banking system. While most dollars in banks are backed only by the bank’s loan portfolio (which are often relatively illiquid and risky assets), every 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 a “digital dollar,” Circle aims to reimagine one of the most important assets in the financial world.
USDC Adoption: From DeFi to TradFi
Of course, the real value of a stablecoin lies in its use case. No matter how well-designed or transparent the product is, the true test of a stablecoin lies in its adoption in everyday use — whether in a blockchain environment or in a traditional payment system.
Dune stablecoin transaction volume dashboard in DeFi
Circle's USDC remains the world's largest regulated digital dollar, natively supporting 16 different blockchains and being used significantly as the preferred stablecoin in DeFi protocols. Among them, the largest trading volume occurs on Solana and Ethereum, and the main use cases include 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: Arbitrum, Avalanche, Base, Ethereum, Noble, OP Mainnet, Polygon PoS, and Solana. To transfer USDC from one chain to another, for example from Ethereum to Solana, three main steps are required:
First, USDC is destroyed on Ethereum (the source chain).
The user then obtains a signed proof of the destruction event from Circle as a receipt for the "destruction event".
Circle uses this proof to authorize the minting of USDC on Solana.
One advantage of this burning and minting mechanism is that it allows compatibility between blockchains running different virtual machines — such as Ethereum’s EVM and Solana’s SVM, 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 lies in its adoption outside of 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 . USDC is seeing growing adoption of all three of these functions in the real world.
As a "store of value," USDC becomes a natural solution for people in developing countries who don't have reliable dollars or dollar-denominated bank accounts. In Argentina, where annual inflation exceeds 200%, stablecoins become an important way for citizens to preserve their wealth. In 2023, 60% of cryptocurrency purchases in Argentina were made with dollar-denominated stablecoins such as USDC, and the country ranked 15th in global cryptocurrency adoption. In December 2023, Circle also announced a partnership with Brazil's Nubank to provide access to "digital dollars" to its 85 million customers.
As a "unit of measure" , USDC has also made significant progress in the past few years, and Circle has conducted extensive pilots with Visa and Mastercard, two of the world's largest payment processing companies. For example, since 2021, Visa has worked with Crypto.com to pilot the use of USDC as a settlement mechanism, and in 2023, Visa announced that it would add support for USDC settlement, working with new merchant acquirers Worldpay and Nuvei, and leveraging the Solana blockchain. Similarly, in 2021, Mastercard announced that it would provide crypto companies with the ability to launch branded cards, using stablecoins such as USDC for settlement.
As a “medium of exchange,” USDC can now be used at any Visa terminal through the Coinbase Visa Card. Launched in 2020 for U.S. consumers, the debit card allows consumers to pay directly with USDC at any Visa terminal, providing a fiat-like payment experience while earning rewards in crypto.
Coinbase Visa Card allows customers to spend USDC at any Visa terminal
Another example of USDC as a “medium of exchange” is the Singapore-based Grab app, a comprehensive app with over 180 million users in Southeast Asia that provides ride-hailing, food delivery, and grocery services. In September 2023, Grab announced a partnership with Circle to create a web3 wallet that supports USDC payments as well as NFT government vouchers and food coupons. Today, consumers can top up their Grab wallets with USDC on Ethereum and Solana.
Therefore, we see that USDC is gaining more and more support and integration in traditional payment systems today, integrating the Internet financial system with traditional financial services. But how does stablecoin as a means of payment compare with existing digital payment systems (such as the Automated Clearing House ACH)?
In many existing systems, such as ACH, funds and messages are moved separately through a centralized ledger. If Alice makes a transaction to Bob via ACH or credit card, the transaction is first marked as "pending" and may take several days to be finally confirmed. This is because at the moment the transaction occurs, the system only sends a "message" indicating that the transaction has occurred, and the funds are not transferred immediately. The arrival of funds is asynchronous, sometimes delayed by several days.
A key advantage of stablecoin payments over these traditional systems is that the funds and the message move simultaneously. Therefore, when Alice makes a stablecoin transaction to Bob, Bob receives the full amount immediately when the transaction message 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, making them more suitable to play the role of "digital dollar" in the future.
Legal and regulatory perspectives on stablecoins
As with any emerging technology, stablecoins raise a number of legal and regulatory questions. 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 circumvent sanctions. This is especially important as the connection between traditional financial services and stablecoins matures over time, building new internet-based financial systems; therefore, attention needs to be paid to advancing the compliance of stablecoin products.
In this article, we highlighted Circle’s goal to make USDC a regulated, transparent stablecoin issued by an issuer that prioritizes compliance. As a regulated money transmitter, Circle follows relevant FINCEN guidelines and state money transmitter laws, and all US users of Circle Mint are subject to anti-money laundering and know-your-customer regulations, such as the Patriot Act.
However, while introducing compliance to prevent malicious actors from abusing stablecoins like USDC is necessary, such regulation should also be more sophisticated and nuanced to protect the interests of ordinary consumers who want to use USDC; creating a regulatory system that excludes ordinary consumers—especially those who are already marginalized by the existing financial system—is not in the United States’ interest.
Currently, 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 before the invention of the modern Internet, let alone digital assets such as cryptocurrencies and stablecoins. Today’s regulators are using tools from more than 90 years ago, and while some guidelines are still useful in certain situations, regulators need to be particularly careful about how to apply existing rules to this emerging industry and develop new rules to effectively regulate new activities based on blockchain technology innovations.
While the blockchain industry can make some technical innovations, such as decentralized digital identity systems, that make it easier to balance end-user needs for privacy with regulatory requirements, these alone are not enough to fill the regulatory gap. Congress must act to increase regulatory clarity around stablecoins and digital assets overall, and new legislation like the draft Stablecoin Transparency Act represents a step in the right direction.
Several other regions, including the European Union, are well ahead of the United States in this regard. Recently, the European Union introduced the Markets in Crypto-Assets Regulation (MiCA), which is expected to be fully implemented in December 2024. The core innovation of MiCA is that it aims to create an entirely new regulatory framework for digital assets, with provisions such as requiring stablecoin issuers to hold liquid reserves, restricting non-euro-denominated stablecoins, and providing a unified authorization mechanism for the EU's 450 million citizens. MiCA represents an important step in improving regulatory clarity in the regulation of stablecoins and digital assets, and Circle's stablecoin is one of the first global stablecoins to comply with MiCA. Based on its work in compliance with MiCA, Circle's products have good prospects for adoption in the EU and becoming a leading compliant stablecoin.
Largest foreign holders of U.S. Treasuries
Therefore, the impetus for Congress to act on stablecoin legislation is very strong . A regulated dollar-denominated stablecoin like USDC can greatly advance U.S. interests in the digital asset space. USDC's reserve requirement means that there will always be demand for U.S. Treasuries. As of June 2024, stablecoins are the 18th largest creditor of U.S. debt, holding more Treasuries than South Korea or Germany. This number will only increase as demand for stablecoins and digital assets continues to grow. In other words, demand for dollar-denominated stablecoins translates directly into demand for dollars and U.S. Treasuries. Therefore, Congress must increase regulatory clarity in the digital asset space to further enhance the power of the dollar in the digital age.
in conclusion
Stablecoins like USDC have come a long way since their inception a few years ago, becoming 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 at the forefront of building a secure 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 individuals to adopt 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 openness and transparency of the Internet to the monetary field and ultimately build an Internet financial system.
