Stablecoins represent an exciting corner of the crypto market. On one hand, they underpin most of the $230 billion decentralized finance market and serve as a vital base pair for crypto transactions. But on the other hand, they don’t have to disclose how much they hold in reserves or where they’re holding them, which makes you wonder about their stability.
Circle Internet Financial Ltd. is to stablecoins what Coinbase is to exchanges – one of the most reputable and above-board providers. And like Coinbase, the company aims to go public. According to Bloomberg, the company is talking to advisors about a potential public listing in 2024 after ending a bid to go public in 2022 via a blank-check company.
In this article, we’ll look at why a publicly traded stablecoin could benefit the crypto market, what sets Circle apart from Tether and other stablecoins, and why you should pay close attention to a potential public listing.
Why a Public Stablecoin Issuer Matters
Stablecoins don’t have to meet the same standards as banks, but Terra’s $UST collapse in 2022 sent shockwaves through the crypto markets. The $18 billion stablecoin was supposed to be pegged to the U.S. dollar using a parallel floating rate cryptocurrency, Luna $LUNA, to back up the peg. But after depositors lost confidence, the scheme came crashing down.
While algorithmic stablecoins like Terra are less common, reserve-backed stablecoins have their own challenges. In May 2021, Tether disclosed that it held nearly half its assets in commercial paper – a relatively obscure and illiquid asset class. And many other reserve-backed stablecoins don’t share where they keep their reserves or even how much they have.
The problem is that reserve composition matters. For example, a sudden run on Tether could force the company to sell a lot of commercial paper quickly. The problem is that commercial paper isn’t a very liquid asset, so the company would have to discount prices to sell fast. And that could result in receiving less than it owes depositors.
Over the past two years, Tether has moved away from the commercial paper market and holds most of its assets in Treasuries and other more reputable markets. However, the firm still hasn’t completed a long-promised audit, which means nobody has any assurances that it’s actually holding the specific assets it says it is.
Circle Aims to Be the Coinbase of Stablecoins
Circle Internet Financial Ltd., the USD Coin $USDC issuer, is the second largest stablecoin issuer after Tether. Unlike its larger peer, USDC’s reserves have been audited annually by a third party since launch, verifying the accuracy, completeness, and composition of its reserves – most recently by Deloitte & Touche LLP, a globally recognized accounting firm.
In addition, Circle publishes monthly statements of the size and composition of its reserves, confirming that they’re at least as large as the amount of USDC in circulation. Its auditor performs a monthly examination of account balances for reserves and on-chain totals for USDC in circulation to provide third-party assurances to its users.
In many ways, these efforts mirror those of Coinbase Global Inc. in the crypto exchange arena. While companies like FTX successfully obscured their balance sheets and operations, Coinbase operates publicly and fully discloses every aspect of its business. As a result, its customers can be more confident that no foul play is happening beneath the surface.
After raising capital from investors like Goldman Sachs, General Catalyst, BlackRock, and Fidelity, the $7.7 billion company is well-positioned to become a forerunner within the stablecoin market, where fiscal prudence and sustainability are critical. And that’s a plus for the entire crypto industry in the post-FTX era.
Circle Seeks Out More Regulation
The crypto market bears an uncanny resemblance to the early financial services industry. For example, most bank runs occurred when many depositors wanted their money back quickly, but their deposits were unavailable due to illiquid or long-dated investments. While the Federal Reserve solved this issue for banks, stablecoins could be making similar mistakes.
Many stablecoins don’t disclose their reserves. It’s most profitable for issuers to hold them in higher-interest investments, such as senior debt, commercial paper, or bonds. But, of course, these investments come at the cost of liquidity. It’s much harder to sell bonds or commercial paper than Treasury securities if you need money immediately.
In contrast to many stablecoins, Circle holds most of its assets ($24 billion at the time of writing) in U.S. Treasury securities – the gold standard for liquid investments. Meanwhile, approximately $1.8 billion is with regulated financial institutions. As a result, USDC is less susceptible to the whims of other types of reserve holdings.
Of course, keeping money at an FDIC-insured bank doesn’t even guarantee everything will go smoothly. After FTX’s collapse, the bank run on Silicon Valley Bank (SVB) led to a crash in USDC’s price since a portion of its deposits were at the troubled bank. Fortunately, the USDC resolved these issues quickly and returned to its peg to the U.S. dollar.
Circle has also been a vocal advocate for more stablecoin regulation. Like Coinbase, the company is eager for the government to provide more clarity.
Finding the Right Time to Go Public
Initially, Circle planned to go public in 2021 through a SPAC (special purpose acquisition company). After announcing its initial plan in July 2021 with a $4.5 billion valuation, the company doubled that to $9 billion in February 2022 when it negotiated a deal with Concord Acquisition Corp. to merge and go public.
However, the two parties didn’t complete the merger before the expiration of the transaction agreement, causing the deal to “term out.” While Circle was careful to avoid blaming anyone for failing to go public, some parties noted that the SEC had not declared its S-4 registration “effective” in time to complete the merger before its expiration.
While Bloomberg reports the company is considering plans to go public next year, the SEC’s actions against Coinbase underscore its ongoing scrutiny of crypto firms. The SEC approved the Coinbase IPO but later said that declaring its S-1 effective does not constitute an SEC or staff opinion on or endorsement of the legality of its underlying business.
Ultimately, the SEC is unlikely to block Circle from going public. Still, the company may want to ensure that it has enough assurances about its business to survive the additional scrutiny that comes with being a publicly traded company.
The Bottom Line
Stablecoins are somewhat of a misnomer. While they’re certainly more stable than a typical cryptocurrency, a lack of reserve transparency and the use of unproven technologies makes them far riskier than cash and conventional equivalents. However, Circle is trying to change that with its transparency and push for more regulations.
With rumors circling that it’s preparing to go public, the company could become the Coinbase of the stablecoin world. The result would be total transparency through public company accounting and an opportunity for conventional investors to participate in its upside potential.
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This material has been prepared for informational purposes only and should not be interpreted as professional advice. Please seek independent legal, financial, tax, or other advice specific to your particular situation.