While these bear markets are rife with rumours, Circle’s USDC has fallen victim to FUD. Jeremy Allaire, CEO of the issuing company, responded to these concerns on Twitter and we take a look back at how stablecoin is collateralised
USDC in the grip of FUD
In times of bear markets, it is common to see what is known as “fear, uncertainty and doubt” (FUD) on social media and in recent days, Circle and Coinbase’s USDC is no exception. The bankruptcies and difficulties encountered by several major players in the ecosystem are indeed conducive to rumours.
The collapse of the UST has instilled fear in stablecoins. Regarding the USDC, if one browses Twitter it is easy to find calls for caution. For example, there are allegations that the company is paying high rates to store its reserves. This would then cost it billions of dollars in interest per year:
Circle’s USDC scheme is on the brink of collapse. If you read their SPAC IPO filings its clear they have been losing money constantly but theres something dirtier happening underneath. They’re at major risk on defaulting on USDC reserves. A deep dive on USDC. pic.twitter.com/GgN5oeD7gO
– Geralt Davidson (@CryptoInsider23) June 29, 2022
As is often the case with such practices, the reasoning lacks sources. It is not clear where the figures are coming from and fragments of truths are arranged together to make a credible story.
The response from Circle’s CEO
Jeremy Allaire, Circle’s CEO, made a point of communicating to dispel the FUD being spread against the USDC.
1/ With so many firms facing fundamental challenges and risks, Circle has amped up our own information about Circle and USDC. Sharing it here so it’s fresh for people to review. We started publishing these in the days following the Terra collapse. https://t.co/SYNpwYxUif
– Jeremy Allaire (@jerallaire) July 2, 2022
In his argument, Jeremy Allaire points out the confusion between the USDC, which has been lent by third parties to players such as Three Arrows Capital (3AC), and the stablecoin reserves:
“There is also an obvious confusion between USDC reserves, which are regulated […] and transparent […] and USDC which is itself used in the lending markets, far from Circle. “
Indeed, whatever amounts of USDC may have been lent to failed actors, these debts are not dependent on Circle. Thus, they cannot impact the company’s balance sheet.
One of the cases in which the company could have been exposed to bankrupt players is the Circle Yield programme. This allows the company to delegate its liquidity to Circle Bahamas and this liquidity is lent to other players to generate returns.
But again, even if the programme fails, it does not create a contagion with the stablecoin reserves. They are effectively independent of it. This means that the reserve used as collateral by the stablecoin is not allocated to risky investments.
USDC: a regulated stablecoin
According to Jeremy Allaire, Circle is in the strongest financial position it has ever been in. He also shares several articles from the company, explaining how the USDC’s dollar peg is maintained. The stablecoin’s reserves are 20% fiat dollars and 80% short-term bonds, namely US Treasury bills.
Each month the reserves are audited by Grant Thornton, the worldᵉ s largest consulting firm. These reserves are mainly held by BlackRock and BNY Mellon. In addition, Circle’s accounts are audited annually by the Securities and Exchange Commission (SEC).
In this respect, the USDC should be distinguished from an algorithmic stablecoin like the late UST. Although the price may fluctuate during large market movements, it will always be possible to trade the asset with Circle at a one-to-one ratio with the dollar.
Of course, despite strict regulation, it is not impossible for a company to lie about its situation. But if such a scenario were to occur, Circle, its managers and the various stakeholders would face significant legal consequences.
Moreover, let us not forget that the EUROC, the company’s new stablecoin backed by the euro, will inevitably attract the attention of European officials. From this point of view, it is therefore in Circle’s interest to be as reliable as possible. This is not to say that we should trust a company blindly. But diversification and critical thinking are the best weapons for success.
