Circle made a big pledge this week in announcing its plans to become the first operator of a stablecoin to list on the New York Stock Exchange: chief executive Jeremy Allaire said his company would “become the most public and transparent operator of full-reserve stablecoins in the market today”.
But the US payments technology company has made the information about the reserves backing its stablecoin more opaque in recent months, removing details, tweaking language and leaving longer periods before reporting.
Allaire’s commitment is likely to come under intense scrutiny as Circle goes through the process of hitting highly regulated public stock markets.
“Why does the market have to wait until [a public listing] for actual transparency?” asked Kyle Gibson, senior staff researcher at MIT Horizon. “What’s stopped them from providing it before?”
Circle touts its USD Coin as “the future of how money moves” and makes transparency one of the digital currency’s biggest virtues. Its vision is for its stablecoin — which is “pegged” to the US dollar — to facilitate payments all over the world in real time.
The message is working. According to the company, the global circulation of USDCs has grown more than 3,400 per cent since January to almost $26bn worth of coins. Traditional financial services providers and other leading players in the crypto industry are jumping on board. In March, Visa unveiled a pilot scheme to use the coin to settle transactions. Hong Kong-based derivatives exchange FTX said it paid a large proportion of its team in USDC.
What is a stablecoin?
Stablecoins are cryptocurrencies that are pegged to another asset, theoretically reducing their volatility. This stability makes them useful for converting between fiat currencies and other cryptocurrencies.
Stablecoins can be linked to asset classes such as physical currencies, baskets of currencies, other cryptocurrencies and even real estate.
Tether, launched in 2014, is the largest stablecoin by circulation, with about $56bn coins. Facebook-backed stablecoin Diem (previously known as Libra) could launch this year.
Stablecoins act as a buffer to help crypto traders manage the volatility in prices between digital and traditional finance and to make it easier to hop between the thousands of different crypto coins.
USDC was launched three years ago as part of a venture called Centre, a consortium comprising Circle and Wall Street-listed exchange Coinbase. It now accounts for about 23 per cent of the stablecoin market, second behind market leader tether, according to data from CoinGecko.
Reserves are the foundation on which a stablecoin is built. Operators say they hold sufficient reserves to guarantee every coin produced. USDC can be redeemed with US dollars, one for one, according to Circle.
Since 2018, Circle has published so-called attestations, provided by Grant Thornton, which look at USDC’s reserves at a moment in time but do not provide as comprehensive a look as a formal audit.
These statements have evolved substantially.
Until March 2020, the attestations said USDC was backed by dollars, held in government-backed US depository institutions. After that, they said the reserves were held at institutions and in “approved investments”, but did not give precise details about what those investments were. By June, it changed the wording on its website from “backed by US dollars” to “backed by fully reserved assets”.
Its reserve account report in February this year said it held $9.3bn in custody accounts; the line was dropped completely for the March and April reports. The only dollar amount mentioned is in relation to $100,000 frozen at the request of law enforcement.
“I always thought that Centre were trying to play the more legitimate role,” said Rohan Grey, a law professor at Willamette university in Oregon. “I think the attestation changes are concerning.”
The publication of attestations has also become slower since December. Last year, they were typically released a couple of weeks after the end of each month. Now they take more than a month to produce, with the attestation for April released in early June.
A listing will, as Circle acknowledges, require it to meet the highest US regulatory accounting standards. Allaire said the listing was an opportunity “to also provide significantly more transparency . . . about the reserves that back USDC”.
Grant Thornton said it could not comment on client-related matters. Centre did not respond to a request for comment on the changes in the attestation.
Circle said in May that reserves included “cash, cash equivalents and short-duration investment-grade assets consistent with our regulatory requirements and supervision under US state banking laws”. The group told the Financial Times delays in recent attestations were due to the currency’s rapid growth and its availability across multiple blockchains.
“USDC has grown so fast that the accounting has likely struggled to keep up”, said Philip Gradwell, chief economist at blockchain analysis company Chainalysis.
Stablecoin reserves have become a hot-button issue in the crypto industry. The New York attorney-general concluded in February that tether’s historic claim that reserves were fully backed by US dollars at all times was “a lie”. Tether paid an $18.5m penalty to settle the charges and did not admit wrongdoing.
In an investor presentation released earlier this week, Circle outlined risks related to USDC, including regulatory changes, taxation and the development of central bank digital currencies.
Stablecoin operators also face other challenges: they are growing so fast that their reserve holdings are stirring concerns over financial stability. Rating agency Fitch this month warned that any rush to convert crypto assets back into traditional money could force stablecoin companies to liquidate reserves, destabilising short-term credit markets.
Regulators and central banks around the world have also increasingly expressed concerns over the impact stablecoins could pose to the implementation of monetary policy, as well as the risk of market manipulation and questionable levels of consumer protection.
“The problem to me isn’t the specifics of any one attestation, it’s the fundamental workings of these kinds of systems,” said Grey.