Circle’s ambition is to become a true national bank. To do so, the company will have to meet new, stricter regulatory requirements. This project would allow the development of the USD Coin (USDC), which has a head start in terms of the strength of its reserves over its main competitor, the USDT.
Circle, the future digital bank: federal requirements to be met
Circle wants to become a “national digital currency bank”. Its CEO, Jeremy Allaire, unveiled his company’s ambitions in an August 9 statement. Circle would become a bank under the direct supervision of the U.S. Federal Reserve (Fed). According to Allaire, this decision should help strengthen the USD Coin. It would also contribute to a more efficient financial system:
“We believe that full-reserve banking, built on digital currency technology, can lead to a financial system that is not only radically more efficient, but also more secure and resilient.”
For now, Circle is not subject to the strict regulations of U.S. national banks. Instead, the company is framed by state regulations on money transfer. This will require it to publish more detailed reports on its operations, including the nature of the assets in its reserves, if it comes under the federal government.
Allaire did not say in his statement whether or not becoming a national bank would require Circle to replace corporate bonds and commercial papers – short-term debt securities – in its reserves with dollar equivalents.
Instead, he noted that Circle expects a sharp increase in the number of USD Coin in circulation:
“Over the next few years, we expect USD Coin to reach hundreds of billions of dollars in circulation, continue to support trillions of dollars of low-friction, high-trust economic activity, and become a widely used tool in financial services and internet commerce applications.”
Transparency and reserve strength: new levers for stablecoins
Circle has published for the first time the details of the dollar-denominated holdings that ensure the parity of the USD Coin to the US dollar in July 2021, 3 years after the first USDC was issued.
The Grant Thornton audit showed that 61% of Circle’s reserves are composed of cash and cash equivalents. Only 9% is made up of commercial papers, compared to 50% for Tether (USDT). Circle’s reserves would be better than Tether’s, as cash and cash equivalents are considered more solid and liquid than the debt securities that make up half of Tether’s collateral.
By becoming a national bank, Circle and USD Coin have a good chance of getting into the good graces of US regulators who want to increasingly regulate stablecoins. This immersion in the banking world will allow the US Fed to get a view, even if only partial, of the backstage of the USD Coin.
