Introduction
USDC is one of the most popular cryptocurrencies in the world. This article reviews the asset reserve held on behalf of USDC owners by answering the following questions:
- what is USDC? What are its characteristics?
- What is the USDC reserve?
- How do we know the USDC reserve actually exists?
- What assets back USDC?
What Is USDC? What Are Its characteristics?
USDC is a stablecoin pegged to the US dollar, meaning that it should always trade at a value of $1.00 USD (in theory). In practice, the price fluctuates slightly depending on the exchange it is traded on, but fluctuations are usually under $0.01.
USDC was developed by payments company Circle and launched in 2018. At the time of writing, USDC had a market cap of 52.08 Billion, making it the second largest stablecoin on the market, behind Tether (USDT).
What Is The USDC Reserve?
the “stable” price of a stablecoin is achieved through a promise from the issuer to sell and buy back coins at the same price. According to this rule, the USDC issuer should be able to sell and buy back USDC at $1.00. The promise of on-demand redemption keeps the price of the coin pegged at its intended value.
This obligation to buy back coins creates the need for a reserve of assets with value equal to or greater than the total value of the coins in circulation. This reserve serves as proof that the coin issuer can redeem coins for the underlying fiat currency regardless of how many coins need to be redeemed. Doubts about a stablecoin reserve could negatively impact the performance of the coin. The stablecoin issuer should therefore maintains a reserve of assets equal to or greater than the total value of all of the coins it has in circulation.
Its also important to note other qualities that stablecoin reserves should have. A Harvard Business Review article states that stablecoin reserves should be held in “high quality, liquid assets — like U.S. treasuries or cash at the Federal Reserve — against their coin liabilities, plus an additional capital cushion against operational losses, asset price declines, or a run. … [stablecoin issuers] should isolate reserve assets from their other assets, so that in insolvency or bankruptcy, coin holders can be prioritized over other creditors.” These qualities are important to keep in mind as we learn more about the USDC reserve.
How Do We Know The USDC Reserve Actually Exists?
The USDC reserve is attested on a monthly basis by Grant Thornton, LLP. this accounting firm is a member of Grant Thornton International, one of the largest accounting networks in the world. The attestation reports provided by Grant Thornton give legitimacy to regular claims by Circle regarding the contents of the USDC reserve. Its important to note that although the attestation reports provided by Grant Thornton verify Circle’s assertions regarding the value of the USDC reserves, they are not audits.
At the time of this report, USDC has not released an attestation report for February, 2022. This story has been picked up by at least one news outlet.
What Assets Back USDC?
Determining what assets back USDC — and what assets backed it in the past — was more complicated than I thought it would be, partially because the types of assets reported to be in the USDC reserve have changed over time. Articles from CoinDesk, Bloomberg, and other new outlets published from mid to late 2021 assert that USDC was not completely backed by cash or cash equivalents at that time. At least one article also states that many of the assets backing USDC carried default risk. An attestation report shows that as of July 31, 2021, cash and cash equivalents made up only 47 percent of USDC reserves. Corporate bonds, which are unsecured debt, composed the next biggest segment of the reserve breakdown at16 percent.
A later attestation report shows that USDC reserves were converted entirely to cash and cash equivalents by September 30, 2021. Cash equivalents are defined in the report as, “short-term, highly liquid investments that are readily convertible to known amounts of cash and have a maturity of less than or equal to 90 days from purchase, as consistent with generally accepted accounting principles (US GAAP).”
The language describing the USDC reserve changed again by the time the most recent USDC reserve attestation report was published. This report describes the reserve as “US dollar denominated assets,” further clarifying that these assets are “the total balances in segregated accounts held by the Company with US regulated financial institutions.” I did not see any information in the report specifying the type of assets in the reserve. My understanding of this report is that the USDC reserve comprises assets that are priced in American dollars, but no further detail is give regarding the assets. I am uncertain of what the USDC reserve comprises after reading the most recent attestation report. I am not saying that USDC is improperly backed — I am only saying that I do not know what types of assets are held in the USDC reserve. This means I cannot guess how fast Circle could liquidate the assets to satisfy redemption needs in the event of a bank run (although I personally believe they could do this immediately or almost immediately). I have no idea what the quality of the assets are, and I don’t know what would happen if government regulation changed the rules regarding stablecoin reserves.
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I am a crypto enthusiast. I am not a financial advisor, and nothing I say constitutes financial advice. All statements I make are opinions and should not be treated as fact without further research.