New Money Theory in Action: Circle's USDC Stablecoin

On Dec. 17, the founders of Circle announced in a blog post, the sale of its Circle Trade OTC business to Kraken. Spokespersons from Circle stated that they are confident that Kraken will continue to deliver a best-in-class OTC liquidity service to its former customers. 

Along with the sale of the OTC business, Circle made a number of organizational changes to help align their operation and talent to match its stablecoin platform service focus and future roadmap. Notably among these changes was the successful sale and restructuring of Poloniex, its exchange business, to a standalone company backed by an Asian investment group.

2020 Road Map

According to the blog, the focus moving forward will be to build on Circle’s core services which support its stablecoin, USDC, and unlocks financial use cases worldwide.  

The blog highlighted that the 2020 product roadmap will demonstrate the stablecoin focus initially in the form of new global payment, custody, and wallet APIs. The founders said, “These APIs will be offered as services to businesses and developers everywhere who will be able to take advantage of the innovation and efficiency of stablecoins without the cost, complexity, and risk of implementing this infrastructure themselves.”

Tip of the Iceberg

While Circle’s platform services have supported its Pay, Invest, Trade, and USDC products and businesses, Circle’s founders stated that what the products the public has seen is merely the tip of the “iceberg” of what the core will be capable of with the new layer of APIs. According to the blog post, these APIs will accelerate the adoption of stablecoins and USDC.

Sean Neville, Founder, Circle said, “It’s an exciting time to be building, as so much of what we’d envisioned upon founding Circle is now finally becoming reality at scale. Stablecoins, third-generation blockchains, and deep global policy engagement suggest to us that the mass-market phase of cryptocurrency adoption is approaching over the next two to three years.”

USDC: Revisited

Stablecoins are a type of digital asset or cryptocurrency designed, as the name implies, to be stable. The minimized volatility in the prices of stablecoins is due to it being pegged to some form of stable asset such as fiat money, commodities and precious metals.

There has been an increased global interest in stablecoins and digital currency backed by central bank money, the introduction of third-generation public blockchains, and the accelerated global policy interest in crypto all provide an exciting backdrop for Circle’s new platform services in 2020.

Reiterating their mission, the founders of Circle wrote, “Many of us in this nascent crypto ecosystem set out years ago on a shared mission to create an improved, inclusive, open financial system for the world. We’ve made a small yet undeniable impact so far, but we’re far from done.”

 

Classification of Stablecoins

According to the report issued by the European Central Bank, there are 3 main types of stablecoins:

1)    Tokenized funds

·     Every unit of tokenized funds represent a claim on the issuer over the funds it received from users;

2)    Collateralized stablecoins

·     Backed by assets whose price in the currency of reference fluctuates over time;

3)    Algorithmic stablecoins

·     Adjustment of token supply to maintain price stability of the reference currency and guide user’s expectations on its future value.

Circle’s USDC is an example of off-chain collateralized stablecoins, which USDC is collateralized in US dollars and can be exchanged for 1 USDC :1 US dollar. For every USDC issued, there is a corresponding US dollar held in the reserve bank account. The rules of issuance and redemption of USDC are overseen by CENTRE Consortium, in which the fiat reserves are audited by Grant Thornton on a monthly basis.

Implications from New Money Theory

Money Flow

Money flow refers to the process of money transfer and redemption. Unlike traditional fiat currencies that is issued by central banks, the smart contracts of CENTRE manage the minting and redemption of USDC. For minting, onboarding customers first access the web application maintained by a licensed CENTRE token-issuing member. The issuer then executes a series of commands with the CENTRE network to mint, verify and validate fiat tokens pegged to the value of deposited funds. After the verification process, customers can use the minted tokens for transfers.

For redemption of USDC, the execution is in reverse of that for minting. Customers access the issuing web application and deposit the tokens into a wallet address made available to his account, then the issuer executes the transfer from the USD reserve to the customer’s designated bank account. In this case, this is different from the money flow of fiat currencies that the tokens are withdrawn from circulation. The USDC will be burnt or destroyed if the value of USDC surpasses the pre-funded fiat buffer maintained by Circle.

Money Form

For off-chain collateralized stablecoins, most jurisdictions do not grant legal effect to the transfer of assets outside the books of existing payment systems and security settlement systems. Only what exists in digital form can be transferred with digital means. Stablecoins such as USDC represent a digital money form and Circle will be responsible to keep USDC in safe custody outside Circle’s blockchain and deliver USDC to users when requested.

Kun Hu, CEO, Blockchain.News and strong advocate of an inclusive and open financial system, commented, “From a higher perspective, this could be viewed as an ushering in of a new form of money flow that will ultimately replace the traditional systems. As discussed in our blockchain in human history series, there are three key aspects where we expect blockchain to have the most significant impact—the issuance of money, the forms of money and the flow and transaction ability of money.” He concluded, “Stablecoins, such as USDC do strongly support two of these aspects, new money flow and new money forms as it is still an encrypted currency, but their values depend on regulation and their underlying assets, which is usually fiat currency.”