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Stablecoins, USDC and the ‘Circle of trust’

Investor confidence in stablecoins has plummeted since the Terra fiasco. Circle’s chief of finance assesses how they’re holding up amid a barrage of “FUD”.

Circle, the issuer of U.S. dollar-pegged stablecoin USDC, has been at the center of a social media storm amid claims that it would go bust if holders of its token were to redeem their requests en masse. But the company’s chief financial officer, Jeremy Fox-Geen, begs to differ.

“Our customers could redeem all of USDC in one day,” Fox-Geen told Forkast in a video interview. “We could process those redemptions, and the only limits to the time that they would get their U.S. dollars back are the limits in the settlement systems of the fiat currency banking system itself.”

Circle’s latest USDC reserves breakdown, as of July 1, according to its website, puts the stablecoin’s backing at US$13.6 billion in cash and US$42.1 billion in short-duration U.S. Treasuries, accounting for 24.4% and 75.6%, respectively, of the US$55.7 billion of USDC in circulation.

“Circle is a regulated financial services company, so there are rules and there are laws that say what we can and cannot do,” Fox-Geen said. “So, unlike a bank, unlike an exchange, unlike any unregulated institution, we cannot use the USDC reserve in any way. We cannot lend it out, we cannot borrow against it, and we cannot use it to pay our bills.”

Twitter user @CryptoInsider23 recently claimed that Circle was at risk of a bank run due to reserve guardians Signature and Silvergate banks allegedly loaning out USDC reserves to high-risk borrowers, many of which now apparently face insolvency. 

CryptoInsider23 accused Signature and Silvergate of recycling fiat reserves to mint more USDC to be loaned out to generate additional yield. Signature and Silvergate are thought to be incentivized to artificially inflate USDC’s market cap, as they are believed to receive a return of around 5% on cash deposits from Circle. 

As blockchain educator and tech industry watcher Anders Larsson has pointed out, such operating expenses cannot be found in Circle’s Form S-4, filed to the U.S. Securities and Exchange Commission (SEC)

Larsson did, however, leave the industry with the question: “What would happen with the reserves if Circle the company goes bankrupt?”

“Under United States bankruptcy law, the USDC reserve is shielded and afforded protections by those laws, such that creditors of Circle cannot access the USDC reserve,” Fox-Geen said. 

Watch Fox-Geen’s full interview with Forkast Editor-in-Chief Angie Lau to learn who and what verifies Circle’s reserves, its special purpose acquisition company route to a stock market listing, and how the developing regulatory environment is impacting the future of stablecoins. 

Highlights: 

  • Does Circle pay its reserve holders?: “To us, FUD (fear, uncertainty and doubt) is just FUD. Most of it — much of it — is not based on fact. It’s speculative, and so we can address, kind of, pieces of it, but at the same time bring it back to the fact that our business model is rooted in minimizing risk for USDC and transparency around everything we do. Now, to the specific question (of paying our reserve holders), the answer is no, we don’t. The concept is absurd, and the writer doesn’t really understand how banks work.”
  • How USDC works: “At its most basic level, when one of our customers wants to create a USDC, they send us a U.S. dollar within the United States banking system that goes into the USDC reserve, and then we mint one USDC into that customer’s Circle account. The reserve itself is segregated from all the rest of Circle. It’s held in segregated accounts titled for the benefit of USDC customers, and it’s afforded the legal protections given to us because we are regulated and USDC is regulated as a stored value asset under United States money transmission laws. And so those laws and that segregation ensure that the USDC reserve is complete and separate from anything else that Circle does.”
  • A seat at the bankers’ table: “I think we’re going to see both bank and non-bank pathways for digital asset players, including stablecoin issuers, to exist and regulations need to settle before plans can be solidified. Our stance is very straightforward. It’s whatever the government, the legislators and then the regulators say needs to happen in order to be a well-regulated stablecoin issuer (that) we will become.”
  • Going public: “Eagle-eyed viewers may have noticed that we have filed a number of amendments to the registration statement that we first filed in August of last year. That’s the normal comment process for the SEC that happens with every IPO, every direct listing, and every listing by way of SPAC. The SEC is looking and it’s doing its job to ensure that disclosures are complete and robust … So we can’t be precise about the timing. Our best expectation is that we will enter the public markets in the fourth quarter of this year.”

Transcript

Angie Lau: Welcome to Word on the Block, the series that takes a deeper dive into blockchain and all the emerging technologies that shape our world at the intersection of business, politics and economy. It’s what we cover right here on Forkast. I’m Editor-in-Chief Angie Lau.

Well, USDC, the stablecoin created by Circle, is the second-largest stablecoin in the world. How is it holding up in this age of crypto contagion? How secure are its assets? And if it’s all about minimizing risk, exactly how is Circle doing that right now? We find out. 

Today — very pleased to be here — we’re in conversation with the chief financial officer of Circle, Jeremy Fox-Geen, to get an answer to that question and so many more. Jeremy, it’s great to have you.

Jeremy Fox-Geen: Angie, it’s great to be here. Thank you.

Lau: Let’s just call it out. The market is extremely nervous. There is currently a market cap of US$55 billion, potentially, going on to US$60 billion worth of USDC on the line. If we see an unpeg the way that we’re seeing others unravel, there is just going to be a lot of wealth destruction. 

If there was a bank run and investors wanted to hypothetically withdraw that US$55 billion worth of USDC today, could it, and could you, redeem all of those redemptions?

Fox-Geen: Well, the first thing to understand is how we hold USDC, how we manage the reserve, and how we’re regulated to ensure that we can meet redemption demands, even in the most extreme stress scenarios. 

We hold the USDC reserve 80% roughly in short-duration U.S. Treasuries and 20% roughly in cash within the United States banking system, and we have advanced liquidity operations capabilities, and our customers can mint and redeem USDC on-demand using our APIs. Fundamentally, what that means is we have US$10 billion (to) US$15 billion of cash at hand to satisfy immediate demands, and U.S. Treasuries themselves are the most price-stable, liquid assets in the world, with a daily trading volume of something like US$650 billion, and they can settle on the same day or at the very least T-plus 1.

So, our customers could redeem all of (their) USDC in one day. We could process those redemptions, and the only limits to the time that they would get their U.S. dollars back are the limits in the settlement systems of the fiat currency banking system itself.

Lau: Fear, uncertainty, doubt. This is a classic FUD situation that we’re experiencing right now. 

There’s just a lot of hesitation now about where the industry is going, what is it doing? And Circle really is at the heart of that play. You are trying to navigate this space, and thus far have really kept within the rails and work with regulators and try to get the bigger institutions and the mainstream institutions into the space. Is that now at risk?

Fox-Geen: No, we don’t think so. We’re committed at Circle to safety, to stability and transparency, and that’s the hallmark of everything we’ve done since we launched USDC from the beginning. And in terms of larger institutions, the world at large, leaving aside the current market conditions within the crypto world and the crypto asset universe, the world is beginning to understand the real promise of blockchain technology.

The world is beginning to understand that just, like, billions of people use the internet every day to exchange information, so (too) one day will billions of people use the internet enabled by blockchain technology to exchange value in new ways, and in old ways, and in ways we haven’t even begun to invent yet. Large institutions are beginning to understand that, and we’re seeing more and more and more businesses — the leading businesses, the class category leaders and everyone behind them — seeking to understand this new world and how their models of commerce can evolve.

Lau: Jeremy, it’s a very rare chance to sit down with you directly, CFO of Circle. I wonder, how are you responding to a lot of the allegations that are circling on the Twittersphere that have gotten a little bit of traction? 

I’ll start with this one: ‘Circle is paying Signature and Silvergate … 5% interest to hold those assets.’ And I’m curious, how does that relationship work? What’s the exposure that that presents in itself? And why are you paying — if you are — 5% interest for those banks to hold USDC?

Fox-Geen: You talked about the FUD that’s reverberating through the markets. To us, FUD is just FUD. Most of it — much of it — is not based on fact. It’s speculative, and so we can address, kind of, pieces of it, but at the same time bring it back to the fact that our business model is rooted in minimizing risk for USDC and transparency around everything we do. Now, to the specific question you just mentioned, the answer is no, we don’t. The concept is absurd, and the writer doesn’t really understand how banks work.

Lau: So, if you have these relationships, the relationship is also that they hold USDC in reserve for banks to do business, those reserves also have to be put to work. The concern is with the contagion that we’re seeing really across the space with 3AC (Three Arrows Capital), with Voyager Digital, with BlockFi, that Alameda Research and FTX have bailed out. We’re seeing withdrawal freezes from Celsius and CoinFlex. These are all really big players in the space and customers that are interconnected through, and perhaps directly or indirectly, to Circle. Can you explain the exposure that Circle may or may not have, and how are you assessing it, addressing it, if it has been impacting Circle’s bottom line?

Fox-Geen: The first piece is just understanding how USDC works. USDC is a digital asset, and it’s a bearer asset that exists natively on the internet. So, at its most basic level, when one of our customers wants to create a USDC, they send us a U.S. dollar within the United States banking system that goes into the USDC reserve, and then we mint one USDC into that customer’s Circle account. The reserve itself is segregated from all the rest of Circle. It’s held in segregated accounts titled for the benefit of USDC customers, and it’s afforded the legal protections given to us because we are regulated and USDC is regulated as a stored-value asset under United States money transmission laws. And so, those laws and that segregation ensure that the USDC reserve is complete and separate from anything else that Circle does. So, that’s the first piece to understand. So, a holder of USDC can always be confident that they can redeem it at any time, one for one U.S. dollar.

The next question you asked was around the, sort of, the borrowing and lending markets of digital assets more broadly. And as we see with any sort of new markets and new innovations… Innovation is a good thing. Frankly, responsible innovation is the right thing and the best way to do it. But those customers are suffering. And it’s important to take a moment just to acknowledge that underpinning the last several years of growth in digital asset markets, to the extent that (former Federal Reserve Chair) Alan Greenspan would have probably have called irrational exuberance in the digital asset markets. Underpinning that (are) real customers who have put their money to work and have put their money at risk, often without knowing the risks and without having the risks clearly explained to them. Did people communicate how much risk they were taking to their customers? Were promises made and not kept? And we’ll unpick all of that as an industry. But you’re right, those markets are challenged right now.

Now, on to Circle. Circle has never been stronger financially. We have de minimis exposure to any of the issues that are currently unfolding in the borrowing and lending markets for digital assets more broadly. 

Lau: To be super, super-specific — USDC reserves held and segregated from Circle as a business. Is there any way that Circle can tap into USDC reserves that are backed by short-term Treasury Bills, cash — 80:20 mix, I think you mentioned — to shore up its own business to potentially in a — bankruptcy, knock on wood, God forbid. Nobody wants to see that for anyone. But in a bankruptcy situation — which unfortunately we’re seeing in the space right now — that Circle cannot touch USDC reserves to shore up its own survival.

Fox-Geen: That’s correct. So, let me explain. Circle is a regulated financial services company, so there are rules and there are laws that say what we can and cannot do. And we’re in the United States and we follow those rules and those laws. That’s foundational to our business. We’re building something here to provide value and utility to our customers. We’re building for the long term. We’re not looking to make a quick buck. So, we’re building what we aspire to be the elements of fundamental infrastructure for this future financial system that the world is going to build on blockchain technology.

To your questions, Circle is not allowed to use the USDC reserve for any purpose other than to give it back to USDC holders on demand. And that’s unlike a bank with deposits. That’s unlike an exchange when you put your money into an exchange, and that’s certainly unlike any unregulated institution, where there are no rules about what that institution can do with your money. So, unlike a bank, unlike an exchange, unlike any unregulated institution, we cannot use the USDC reserve in any way. We cannot lend it out, we cannot borrow against it, and we cannot use it to pay our bills.

Now, (your) second question was about bankruptcy. Under United States bankruptcy law, the USDC reserve is shielded and afforded protections by those laws, such that creditors of Circle cannot access the USDC reserve.

Lau: That’s clear. And I want to know how you pay your bills, the future of Circle, how Circle has managed to grow its market capitalization in the last few months despite the crypto turbulence. 

I grilled you there pretty hard, Jeremy. I probably have a few more to do. 

Fox-Geen: That’s your job, Angie.

Lau: That is my job. You’ve been very clear on some specific points. One thing is, there are two sides to this story, I think everyone can agree. During this market turbulence of ours in the crypto industry, especially post-collapse of UST, we’ve seen a lot of redemptions. There are some competitors in this space. Circle is not the only (one). It’s the second-largest stablecoin in the world. It’s not the only one. Tether is the largest. But you’re catching up. Your market cap is around US$55 billion right now. You’ve gained US$6 billion during that window — the same window when Tether lost about US$16 billion in market cap. First of all, how were you able to do that, and why?

Fox-Geen: So, I’d focus listeners’ minds on what we do, and not really talking about what others do. We started from the very beginning, and we set out to build the most trusted, robust, stablecoin possible. That’s not just how the reserve is held. That’s added layers of transparency, and that’s operational issues as well. That’s robust liquidity management. That’s API so our customers can mint and redeem 24/7, 365 in certain cases, with certain customers, with certain relationships where banks have enabled that type of settlement. 

The institutions that hold the USDC reserve aren’t lending it out in any way to grow USDC — they’re just holding fiat currency within the banking system and holding U.S. Treasuries in custody on behalf of USDC holders, so there’s no lending out of USDC to grow USDC. All USDC growth is driven by customer activity.

Lau: I want to talk about this sensitive topic of auditing. It’s very clear. You’ve been very specific. Why do people and the market feel the need to understand the true breakdown of the underlying assets. Are those audits available?

Fox-Geen: Circle, as a company, has been audited nearly since inception for many years. The USDC reserve has been audited annually since launch, and that’s publicly available for 2021 and 2020 as part of our own public filings with the SEC. But what’s important to understand here — because there’s, again, there’s a lot of FUD and misinformation in the market — what’s important to understand is what’s an audit and what’s an attestation.

I get asked all the time: ‘Why do you publish attestations? Why not an audit?’ The answer is, there is an audit and it is public. The USDC reserve has been audited annually since launch in 2018 by a leading global accounting firm as part of Circle’s annual financial statement audit. That audit verifies the completeness of the reserve and the composition of the reserve, and it tests the controls we have around the reporting that ensures the accuracy of the financial statements that report, among other things, the reserve. And those, as I said, are available publicly, and we will continue to publish quarterly financial statements of Circle. 

Since launch, we also wanted to provide the additional assurance of attestations, and what an attestation is, it’s a different type of assurance engagement. So, every month, our auditor reviews the statements that we make about the USDC reserve and says they’re true, confirms that they’re true, because they’ve done the testing and those statements say there are more dollars in the reserve than there are tokens outstanding. And those statements also say the composition of the assets that are in the reserve. They also say, to some degree, where those assets are held, they’re all with United States-regulated financial institutions.

Lau: On one hand, yes, you work with small and medium-sized businesses, but also big institutions, bringing more in. One, obviously — BlackRock — is most notable as a key investor and partner with Circle. And then, on the other end of the spectrum, are real people who depend on wealth preservation with USDC. So, how are you managing just what a lot of people see as a crisis right now, a crypto winter, and navigating that, from your point of view and from the executive level at Circle.

Fox-Geen: It’s a great question. We’re navigating it by doing exactly what we’ve always done, which is: build things the right way, which is embrace regulation because it brings benefit to customers. And we think this is demonstrated not only by the success of Circle and of USDC and of our other products and services, but also demonstrated by the nature and quality of the institutions that are seeking to build upon our infrastructure or partner with us. You mentioned some of them in your question. That BlackRock, the largest, I think, asset manager in the world and the largest participant in the capital markets in the world, an institution who manages — to the end of your question — who manages pension fund money for millions and hundreds of millions of people, has seen fit to partner with Circle is a notable moment for USDC and for Circle and for the industry. It’s a huge signal.

The reserve is custody of the Treasuries by BNY Mellon — the Bank of New York Mellon — which I think is the largest custodian in the world, is a signal that it’s being done right. But that’s just the people working with Circle. Then there are the people building on USDC. Obviously, USDC has been built upon by developers globally, from the smallest startups up, but also you have institutions like MoneyGram — one of the leaders in cross-border remittances —  who said: ‘You know what —  we’re going to start to use digital assets because they’re better for this purpose. We’re going to start to use USDC and enable that for our customers.’ So, I’ve just given some examples building on your question of major institutions as well as many, many startups that are building on USDC, and they’re doing so because it’s trusted.

Lau: The regulatory space is very much part of the fabric of Circle, and I want to understand that a little bit more. There are plans, as we know, for goals to become a bank or banking license. How’s that going? Is the Federal Reserve… does it have an appetite to award that designation to Circle? What are you hearing? And how is that all being played out right now, especially during these market gyrations?

Fox-Geen: There’s a lot in your questions — bits about Circle and bits about the market as a whole and the gyrations of the market. What we’re seeing — and this may be a statement of the obvious to everyone who follows the industry, we’re seeing regulators pay more and more attention, and we’re seeing lawmakers pay more and more attention. There are some who have been paying attention for a long time, and who have wanted to bring more and evolved regulation to digital asset markets, and they haven’t done so because the world wasn’t ready. Now, as you said, with the gyrations in the market and the challenges that many borrowing and lending institutions are facing, and the impact of those challenges, and of the decline in value on real people and having real impact, we’re seeing, I think, an acceleration of regulation of digital assets. We’ve just seen MiCA (the Markets in Crypto Assets regulatory framework) in Europe, there are several proposals in the United States, and there are several agencies, each with different views on how — in the United States — digital assets should be regulated. And there are many other countries around the world that have advanced digital asset regulation, and we have activities and relationships with many of these regulators globally. We think more regulation will be coming soon and crisper regulation will be coming soon. 

Lau: Japan recently approved stablecoin issuance, but from major banks only. You also have the Biden administration coming in with a president’s working group saying that stablecoins should be issued by either an entity that is a bank or an entity that would be regulated like a major bank. And so the question is, what are your plans on becoming a bank?

Fox-Geen: Our stance is very straightforward. It’s whatever the government, the legislators and then the regulators say needs to happen in order to be a well regulated stablecoin issuer (that) we will become. And we have close relationships with all of these regulators at the principal level and with their staffs. And we talk to them all the time, including many of the leading regulators who do not currently regulate us today. We have ongoing dialogs with them so they can learn more about our business, more about us, more about how we do business, which is very important. And they can start the process of thinking at the staff level: ‘How can the rule books that we have today be possibly even applied to a company that looks like this?’ So, there are many, many levels of our own interaction with regulators, and the future pathway isn’t settled yet, but I think we’re going to see bank and non-bank pathways. If the regulator said you need to become a bank, well, then we’ll become a bank.

Lau: In a way, paving the roads in the wild, wild west. That’s what we’re seeing right now in the pioneering days. And, certainly, that’s the next stage of growth. A lot of people anticipate that. What are your SPAC plans? Do you plan to do your IPO?

Fox-Geen: It’s a great question. A SPAC is different from an IPO. We announced in the middle of last year — at the beginning of July — that we were planning on going public through a merger with a special purpose acquisition company, Concord Acquisition Corp. Those plans still exist. We entered into a transaction with Concord. We are under registration with the SEC. Eagle-eyed viewers may have noticed that we have filed a number of amendments to the registration statement that we first filed in August of last year. That is the normal comment process for the SEC that happens with every IPO, every direct listing, and every listing by way of SPAC. The SEC is looking and it’s doing its job to ensure that disclosures are complete and robust. And you can see and some people have even written about it, you can see the evolution of those disclosures, so that when we do go public — much as we’ve been saying, as I’ve been saying through this conversation — we’re doing so with the highest standards of transparency so people can really understand what it is they would be buying. We expect the timing of our eventual listing, therefore, is in the hands of the SEC, who have been faced with a novel industry and novel issues, and are doing their own work to make sure that the disclosures that we are volunteering are answering all of the questions that they have, and that’s a good thing. So, we can’t be precise about the timing. Our best expectation is that we will enter the public markets in the fourth quarter of this year.

Lau: Are you worried about where this market is growing? How cold will this crypto winter get?

Fox-Geen: Well, we’re not worried. But, using your words, the crypto winter could get very cold indeed. From a company perspective, we’re fortunate, and by intent are in a very strong financial position, so we’re able to continue to accelerate our investments in building this future financial infrastructure of programmable money that I talked about a little bit before. So, we’re hiring people, we’re investing, and we’re going to continue to do that, and we’re able to do that whether we’re public or private and however long this crypto winter may last.

Lau: You’ve provided a lot of clarity, and I really appreciate the time that you’ve spent with us. I absolutely agree that, at the end of the day, what doesn’t kill us makes us stronger. And when it comes to the concerns that we have in this market, the opportunity today to really dive into the understanding of how markets work, what the interconnection is, and how you’ve been structured, is really one big signal as well.

So, Jeremy, thank you so much for sharing your time with us today on Word on the Block.

Fox-Geen: Angie, thank you so much. And just your closing remarks reminded me of a quote, I think, attributable to Bill Gates, which I feel is very relevant now in this time of challenge in our markets. And it was: ‘We always overestimate the amount of change we’re going to see in the next two years. And we always underestimate the amount of change we’re going to see in the next 10 years.’ We firmly believe that we’re here for the long haul. Thank you, Angie, for your time. Tremendously great to be here.

Lau: Absolutely. Jeremy, thank you. 

And thank you, everyone, for joining us for this very important conversation on Word on the Block. It was great to have you all here. I’m Forkast Editor-in-Chief Angie Lau. Until the next time.

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