USDC brings stability to cryptocurrency. It would behoove the financial system if policymakers took measures to foster its adoption.
Ignore the doomsayers. The United States is still the world’s leading economy and will remain so in the future. With its global talent pool and world-class institutions, the U.S. has a competitive edge in virtually every emergent technology. Web3 is no exception.
Despite its advantages, America is bungling its chance to dominate the digital economy. In what Messari CEO Ryan Selkis aptly dubs “a colossal public policy failure,” America’s semi-official stablecoin, USD Coin, is losing ground to its ex-U.S. rival, Tether. If policymakers don’t step up soon, America may fall behind for good.
Manifest destiny in the metaverse
Until recently, USDC seemed destined to become Web3’s de facto reserve currency. Regulated by the U.S. Treasury and managed by Circle Internet Financial, USDC is a rare beacon of accountability in crypto. It is also phenomenally liquid. USDC is redeemable 1:1 for dollars, which Circle holds as cash or deposits in a transparent reserve managed by BlackRock.
Users have taken notice. Since its launch in 2018 until last year, USDC’s circulating supply has grown at a blistering pace, averaging 860% annually, according to Circle. By mid-2022, USDC’s market capitalization had crested at $55 billion. Meanwhile, Circle began rolling out a veritable Marshall Plan for Web3 infrastructure, including on-ramping rails and custody solutions. It is now onboarding institutional clients.
Importantly, Circle heavily emphasizes U.S. regulatory compliance, including American sanctions. For better or for worse, Circle can freeze USDC in blacklisted wallets at its discretion. It has frozen more than 8 million USDC across more than 150 wallets to date, according to Dune. It’s clear that USDC is already a potent tool for projecting America’s power on-chain, and it’s just getting started.
In the past year, USDC’s fortunes have reversed dramatically. Since its 2022 highs, its market capitalization has dropped by nearly half to around $30 billion. In a brief but unsettling depeg in March, USDC’s price dipped below $0.90 on some exchanges. Even more concerningly, USDC has started losing ground to its ex-U.S. rivals, particularly Tether.
To be sure, USDC’s decline partly reflects sector-wide outflows, and its depeg, triggered by Silicon Valley Bank’s collapse, was a product of market panic, not poor fundamentals. However, the fact remains that, as USDC’s market capitalization hemorrhaged in recent months, Tether’s increased by around $15 billion.
Now, with more than $80 billion in circulating supply, USDT’s market dominance is beyond dispute. That’s a win for Tether’s Hong Kong parent, iFinex Inc, which also runs the Bitfinex crypto exchange. However, it’s a blow to U.S. interests, as well as Web3 as a whole.
From a U.S. policymaker’s perspective, iFinex is Circle’s evil twin. While Circle’s fiat reserves are transparent, iFinex’s are famously opaque; while Circle’s relationship with U.S. regulators is friendly, iFinex’s is fraught; and while Circle is aligned with American interests, iFinex is a mercenary.
It’s not too late for USDC to regain its footing. In fact, even without active support from policymakers, USDC is likely to thrive on its own merits. The U.S. Treasury’s oversight has established USDC as the gold standard among stablecoins, and Circle’s infrastructure stack is certain to attract new users.
That said, American officials shouldn’t leave the outcome to chance. Bipartisan crypto legislation may be elusive, but plenty of policy levers exist already that could advantage USDC at negligible cost. For starters, the Federal Reserve should greenlight Circle for its reverse repo program, which would backstop USDC with a deep well of highly liquid, risk-free loans.
Similarly, the Securities and Exchange Commission should encourage the proliferation of compliant, tokenized securities denominated in USDC. Meanwhile, regulators should support Circle’s infrastructure initiatives with clear guidance for issues such as on-chain Know Your Customer, Anti-Money Laundering and financial reporting.
For too long, the U.S. has treated Web3 as a regulatory headache rather than as a strategic priority. In the contest for stablecoin dominance, the stakes are too high to ignore. It’s time for the U.S. to pick sides.