What is USDC?

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robertstevens

Robert has reported for a variety of international publications including the Associated Press, The Guardian, Vice, and Decrypt. Current areas of interest include the political economy of technology, cryptocurrencies, and privacy. Robert has a Bachelor of Science from UCL, and a Master's degree from the University of Oxford's Internet Institute.

USDC is a US-dollar stablecoin minted and maintained by Centre, a consortium of Circle, a large crypto payments company, and Coinbase, a publicly-listed cryptocurrency exchange.

The value of USDC is always pegged to the US dollar, and this peg is backed by reserves of US dollars and other treasuries. It is one of many stablecoins: Some are pegged to different assets, and some maintained by a company and its reserves while others are maintained by algorithms.

USDC was created in 2018 by Circle and Coinbase. Coinbase is one of the largest cryptocurrency exchanges in the world. In April, 2021, it went public on the Nasdaq, making it subject to the reporting requirements of all major public companies. Boston-based Circle aims to go public in 2022.

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It started life as an ERC-20 token, meaning it was minted on the Ethereum blockchain. In recent years Centre has grown tired of the Ethereum blockchain, which currently offers slow transaction times and comes with high fees at times of great network congestion. USDC has since expanded to other blockchains, including Algorand and Solana.

Why use stablecoins?

Stablecoins such as USDC are useful for traders who want to keep their money in crypto but avoid the volatility of the cryptocurrency market. While Bitcoin’s value can fluctuate by a couple of thousand dollars a day, the value of a US dollar stablecoin is (theoretically) always equal to one US dollar. The dollar, often considered the reserve currency of the world, has historically withstood market shocks far better than Bitcoin.

While you can trade cryptocurrencies straight for regular money such as real US dollars on lots of exchanges, the process is usually more cumbersome than trading cryptocurrencies for other cryptocurrencies. Banks sometimes block transfers to cryptocurrency exchanges, take a couple days to process transactions, or charge additional fees. Stablecoins like USDC often are free to trade on centralized exchanges, transactions are very quick, and the coin is relatively cheap to send to other people. When the market crashes, traders often move their money into stablecoins so that they can invest in the market again very quickly when it bounces back.

Stablecoins like USDC and Tether (USDT) are also useful when buying and trading cryptocurrencies on exchanges, since almost all coins will have pairings for at least one of the currencies. (So, while an exchange might not let you directly trade Monero for Litecoin, it probably lets you sell Monero for USDC, and then lets you use that USDC to buy Litecoin.)

This stability is also very useful for decentralized finance protocols. Non-custodial financial contracts use algorithms to generate interest for investors, either by investing in automatic market-making protocols or by lending it out on investors’ behalf.

These protocols do not accept regular money—they only accept cryptocurrencies. (The same applies for the handful of companies, like BlockFi or Coinbase, that do the same.) While returns on deposits of other cryptocurrencies are dependent on the value of those cryptocurrencies (a 10% annual return on Bitcoin is pointless if Bitcoin crashes by 10% within the year), USDC returns are paid out in the crypto equivalent of US dollars, historically a far less volatile currency.

Stablecoin usage took off in 2020 amid the boom of decentralized finance. These non-custodial protocols offered high annual percentage yields on investments, so long as investors could stomach hacks and volatility and navigate around scams.

Coins like USDC became popular. The market cap of USDC—essentially, an indicator of how much money had been invested in it—rose from $516 million on January 1, 2020, to $2.6 billion by October of that year.

USDC’s market cap increased further when Bitcoin’s price took off around October of 2020 and kept rising until it set its all-time high of about $64,000 in the spring of 2021. USDC’s market cap has swelled to $28 billion, as of August, 2021, and shows no signs of slowing down.

How does USDC work?

USDC is minted on several different blockchains, including Ethereum, Solana, and Algorand, whenever investors give the Centre Consortium some real US dollars.

Centre keeps this money and invests it. In its most recent transparency report, published in July, 2021, and audited by Grant Thornton, Centre said it 61% of the $22 billion it keeps in reserves in cash and cash equivalents, 12% in US Treasuries, 13% in Yankee CDs, and commercial paper, corporate bonds, and municipal bonds.

In a blog post in late August, Circle said that it would avoid commercial paper and would be only backed by cash and U.S. treasury bills. “These changes are being implemented expeditiously and will be reflected in future attestations by Grant Thornton,” it wrote.

While instruments like cash, cash equivalents, and US Treasuries are kosher and stable, critics of stablecoins companies remain concerned about what comprises “commercial paper”—short term debt issued by corporations.

Companies usually disclose whose commercial paper they have bought, but crypto companies like USDC and Tether have said that such information is confidential. The risk is that this commercial paper is tied to other cryptocurrency companies, who could struggle to repay their debts if the crypto market crashed. This risk is far greater for Tether, which is backed by nearly 50% commercial paper.

With a market cap of $27 billion, it is the second largest stablecoin behind Tether (USDT), which has a market cap of $62 billion.

Tether is a source of tension within the industry, not least because has been accused of lying about the backing of its reserves by the New York Attorney General. Following an investigation by the NYAG, it said its reserves were just 78% backed by the US dollar.

How can you buy USDC?

USDC is available to buy at most cryptocurrency exchanges, like Binance, Coinbase, and Uniswap. To buy it, you’ll have to load up your wallet with another cryptocurrency or buy it with a fiat currency like the US dollar. Assuming you’ve bought it from an exchange that lets you withdraw assets, you are then free to do whatever you please with your USDC.

You can buy or sell USDC just like any other cryptocurrency, or stake USDC in decentralized finance smart contracts. Note that USDC operates on several blockchains—Ethereum, Algorand, Solana, Stellar and TRON—and you’ll have to ensure that your version of USDC is compatible with the blockchain in which you are trying to stake USDC.

Why stablecoins have a bad reputation

While stablecoins are perfectly legal, they have a bad reputation among financial regulators. The companies that run them are not particularly transparent and, in the case of Tether, are the subject of investigations to determine whether they’ve misled investors about their backing. After its investigation, New York banned Tether. Attorney General Latitia James mmade this statement about the investigation:

“Tether’s claims that its virtual currency was fully backed by U.S. dollars at all times was a lie. [Tether and its sister company, Bitfinex] obscured the true risk investors faced and were operated by unlicensed and unregulated individuals and entities dealing in the darkest corners of the financial system.”

And in a November, 2020, letter, European Central Bank president Christine Lagarde said that stablecoins “pose serious risks.” She said that if they are widely adopted, they “could threaten financial stability and monetary sovereignty.”

A letter by the G7 continued Lagarde’s thought, warning that stablecoins can facilitate terrorist financing and threaten financial stability. “In some designs, agents such as designated market-makers may have significant market power and ability to determine stablecoin prices, with the potential for market abuse,” wrote the G7.

It is not difficult to understand why a central bank, which controls a nation’s coin, is so worried about the sharp rise of private companies who could usurp its authority. One thing to note is that although USDC and USDT are run on blockchains, and are thus somewhat decentralized, the companies that run them can freeze transfers—and often do so whenever there’s a big hack.

All this criticism from regulators is particularly relevant when considering the future of stablecoins: If governments consider coins like USDC a threat, they could legislate them out of existence.

Last Updated September 7, 2021

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