Circle to simplify reserves of USD Coin as stablecoin competition grows

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Cryptocurrencies updates

Circle has said it will take a conservative approach to managing the reserves backing its stablecoin, as the company heads towards a stock market listing and as a battle between assets central to the plumbing of the crypto market heats up.

The US payments group’s USD Coin, the world’s second-biggest stablecoin, will be exclusively backed by cash and short-term US government debt beginning in September, Circle said on Monday.

The announcement comes at a time of growing scrutiny from financial regulators and as Circle is seeking to differentiate itself from market leader Tether.

“As industry and government work together on the appropriate future supervisory standards, we are committed to maintaining or exceeding those standards, driving innovation, and building reliable, trusted, secure and compliant infrastructure for dollars on the internet,” said Circle chief executive Jeremy Allaire.

Stablecoins are digital tokens pegged to other assets, often including conventional financial assets. Typically that means providers say they are backed one-to-one by dollars. Traders use them to rapidly move in and out of other cryptocurrencies.

The stablecoin industry has grown from less than $30bn to more than $110bn during the course of this year, according to CoinGecko.

Tether is the world’s biggest stablecoin, but it has sustained criticism from some industry participants and regulators over its reserves. The group in February settled with the New York attorney-general for $18.5m, branding its claims that it was fully backed by US dollars at all times a “lie”. Tether did not admit wrongdoing.

Tether has since begun publishing a broad overview of its reserves. As of its most recent financial statements, about half is held in commercial paper, a form of short-term corporate debt, with Treasury bills making up about a quarter. Cash and bank deposits amounted to roughly 10 per cent. The group says its corporate paper is highly rated, but it does not provide specifics on which companies or countries the debt comes from.

Circle has tweaked its reserve policy in the past, but said in May the portfolio backing USD Coin included 61 per cent in cash and cash equivalents and an additional 12 per cent in Treasuries. The remainder included 9 per cent in highly rated commercial paper, with no further details on the issuers.

Centre, a consortium led by Circle, said the decision to go with a simpler approach of holding cash and short-term Treasuries, considered to be some of the world’s premier reserve assets, came after discussions with “users, developers and other stakeholders”.

Regulators have voiced increasing concerns about the rapid growth of stablecoins. In July, top US officials including Janet Yellen, Treasury secretary, said they expected to issue recommendations in the coming months, and raised potential risks to consumers, the financial system and national security.

The potential for stringent regulation is an issue Circle will need to contend with as it proceeds with its plans to list on Wall Street through a $4.5bn deal with a blank-cheque company chaired by former Barclays chief Bob Diamond. Circle also said earlier in August it planned to become a national digital currency bank that would be overseen by the Federal Reserve, the US Treasury, the Office of the Comptroller of Currency and the Federal Deposit Insurance Corporation.

The change to USD Coin’s reserve policy drew criticism from some analysts, who said that it highlighted the lack of regulatory oversight in the stablecoin arena and the ability for companies to make changes with little oversight from stakeholders.

“It seems they saw which way the wind is blowing,” said Rohan Grey, a professor of law at Willamette University in Oregon. “At the end of the day, they do whatever they feel like and customers have to suffer whatever the consequences are.”

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