From stablecoin to a bank: perhaps, the greatest challenge of 2021. Part 1

    19 Aug 2021

    The Circle company, known as the issuer of the USDC stablecoin, is set to become a US national commercial bank – a digital bank that combines crypto and fiat payments. This is yet another way the cryptocurrency industry is invading traditional banking.

    We have only just written about how crypto exchanges are becoming competitors of traditional banks by expanding the range of financial services they offer (which also brings about the wrath of financial regulators). Today, we have another trend to discuss: the issuers of stablecoins wanting to become banks themselves.

    Circle is clamoring for a national commercial bank status, which will put it under the supervision and guidance of regulators, in line with the Federal Reserve System and the US Treasury requirements. On August 9, the company announced that its goal is to create a digital bank that combines cryptocurrency and fiat payments.

    As you may remember, the USDC stablecoin was launched in 2018, about five years after the founding of Circle. Through collaboration with Coinbase and state regulators, USDC has been developed in compliance with US money transfer laws.

    Here’s what Circle management is now writing in their blog: “In our founding documents, we envisioned creating a global digital currency bank that would provide seamless, instant, and near-free payments, combining fiat currency reserves with open, unregulated blockchains, ultimately using these open networks to support new forms of capital accumulation.”

    Сompany executives also claim that launched just three years ago, USDC is now an essential piece of infrastructure for a new financial system with digital currency support. More than $ 27.5 billion worth of USDC tokens are currently in circulation. With them, Circle wants to become a US national commercial bank with a full reserve, operating according to the Fed, the US Treasury, OCC, and FDIC supervision and risk management requirements.

    “We believe that full reserve banking, powered by digital currency technology, can lead not only to radically more efficient but also a safer and more resilient financial system”, – the statement says.

    The Circle top management predicts that in the coming years, USDC will increase its circulation to hundreds of billions of dollars while continuing to support trillions of dollars in economic activity. Due to its high level of trustworthiness, the stablecoin will supposedly be widely used in financial services and e-commerce applications. That, in turn, should contribute to revealing the potential of digital currencies in the real economy.

    Meanwhile, Circle and its USDC are not alone in their pursuit of invading traditional banking territory. Similar ambitions are expressed by Paxos, the issuer of regulated stablecoins backed by the US dollar: Paxos Standard (PAX) and Binance Dollar (BUSD, in conjunction with the Binance crypto exchange).

    It has even recently caused a conflict: First, there was a report issued by the Grant Thorton law firm, which claimed that only 61% of USDC’s collateral is “cash or its equivalent”. After which, one of the Paxos executives, Dan Burstein, published an article on “regulated” and “unregulated” stablecoins. In it, he compared his company’s stable cryptocurrency to USDC and USDT, arguing that only PAX and BUSD are legitimately regulated because they are overseen by the New York State Department of Financial Services. The volume of these currencies in circulation ($ 12.6 billion) is less than the volume of USDC ($ 27 billion) and USDT ($ 110 billion).

    However, as Dan Burstein points out, PAX and BUSD have 96% of their collateral in cash and cash equivalents, with 4% in US government bonds. USDC, on the other hand, only has 61% in cash and its equivalents and 12% in American government bonds. The rest is various assets (municipal and corporate bonds, commercial company shares, etc.). As for USDT, as much as 49.6% of its collateral is commercial securities, 18.4% – deposits in fiat money, with cash accounting for only 2.9% of collateral and US government bonds for 2.2%. Turns out, from an ordinary American (and not only American) citizen’s point of view, only PAX and BUSD are truly secure stablecoins, whereas USDC and USDT have dubious collateral.

    In response, Tether (the issuer of USDT) published another quarterly report in which the auditor confirmed that all USDTs are backed by assets. However, the auditor itself is registered in the Cayman Islands, which led to quite a few “crocodile” jokes after it has been pointed out in the media.

    So fasten your seatbelts – it’s on. While cryptocurrency platforms (you can’t even call them just “exchanges” now) are planning to conquer the banking services market, stablecoin issuers have their own intentions regarding the matter.

    To be continued…

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