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USDC Moves to be Fully Backed by Cash

Cirlce, the stabelcoin known as USDC, is moving to be fully cash backed.

USDC Moves to be Fully Backed by Cash
Photo by Ryan Quintal / Unsplash

USDC, the stablecoin from the company Circle and the second largest stablecoin, revealed in July that they were backed by ~60% cash and cash equivalents. They’re now planning to increase that amount to 100% by September, while their #1 competitor in the space, Tether, is being forced to answer questions of validity owing to a failure to reveal their holdings.

Stablecoins are intended to be cash equivalents pegged exactly to a fiat currency (in this case, US dollars); this means that the price of USDC is almost always exactly $1/coin. The holdings that support the stable coin are very important because they can determine the risk of the coin long term, and in theory, the stability of the entire trading ecosystem.  USDC’s move to increase cash reserves comes after months of regulators' increased scrutiny of Tether.  Earlier this year, Tether revealed that only 2.9% of it’s holdings were in cash or bonds, and the majority of their holdings were in commercial paper, a form of unsecured, short-term debt. Additionally, Tether reached a settlement with the New York State Attorney General’s office over allegations regarding the movement of hundreds of millions of dollars to cover up $850 million in losses. Tether agreed to pay $18.5 million and have been barred from operating in New York.

Circle plans to go public in Q4 of 2021 via a special purpose acquisition company (SPAC).  The SEC reporting requirements brought on by being a public company is just another step in Circle’s move to increase transparency and gain customer trust.

The Takeaway: Circle (company behind USDC) has observed the skepticism surrounding Tether’s commercial paper holdings, and is taking the opportunity to move to be fully backed by cash and cash equivalents; doing so should further de-risk USDC and increase consumer trust in the stablecoin.