Last Updated: 19 July 2022
Since the collapse of Terra’s stablecoin UST, other stablecoin companies have been trying to convince investors that their stablecoin is safe. Circle, the company behind USDC, has, therefore, chosen to be as transparent as possible.
Circle wants to be transparent
Circle has therefore shared a report in which they explain in detail how their reserves are built up. These reserves are needed as collateral to ensure that each USDC issued is actually worth one dollar.
— Circle (@circlepay) July 15, 2022
This is the first time that Circle has shared so many details, but it should be noted that this report has not been verified by an external party. Still, it shows that the company sees that transparency is important to maintain investors’ trust.
Dollars and government bonds
Circle’s report shows that the company no longer holds commercial paper, a type of short-term, unsecured debt instrument, as part of its services. In July last year, Circle held 9% of its reserves in commercial paper but later promised to switch entirely to cash and US government bonds.
This week’s report shows that Circle held $42.1 billion worth of US government bonds on 30th June. All of these bonds mature before September 29 or earlier. The rest of the company’s reserves of $13.6 billion are reportedly stored in real dollars and held at regulated financial institutions such as Signature Bank, Silicon Valley Bank, Silvergate Bank, and others.
That brings Circle’s total reserves to $55.7 billion, slightly more than the $55 billion USDC tokens currently in circulation.
How does stablecoin’s value remain stable?
USDC is currently the fourth largest cryptocurrency by market capitalisation and the second largest stablecoin in the crypto-economy. A stablecoin always tries to maintain the same value as the fiat currency they represent. For example, there are stablecoins that are always worth 1 euro or 1 yen, and in the case of USDC, 1 dollar.
Generally, stablecoins achieve stability by offering immediate and easy exchangeability against the underlying value. The general public should be able to trust that the company behind the stablecoin is doing everything possible to keep the price stable at 1 dollar. Should the value of USDC on an exchange go up or down, for example, this creates arbitrage opportunities for traders.
But the market, politicians, and regulators are often skeptical about many stablecoin companies. They question these companies’ reliability and believe that these companies cannot guarantee that their stablecoin will always be worth $1.
Downfall of Terra
These voices have only become louder after the collapse of one of the largest stablecoin projects in cryptocurrency history. In May, Terra’s UST collapsed. UST’s price quickly dropped from $1 to worthless, which also called into question the reliability of other stablecoins. The big difference is that Terra never had the necessary dollars in cash and relied on an algorithm to keep the value stable. This algorithm was determined by code and not by enough financial reserves. They held several cryptocurrencies, which they sold and bought again to keep the treasury afloat.
Terra attracted billions of dollars in investments because they offered up to 20% interest on UST deposits on the now defunct Anchor lending protocol. After users withdrew their money from Anchor, UST failed to hold its price, and both stablecoin and its sister token, LUNA, were worthless within days.
Paxos and Tether
Centralised stablecoin issuers such as Circle, Tether, and Paxos have since faced more pressure to assure their customers that their tokens will not suffer the same fate.
Last week, Paxos released a similar report on its reserve positions. Paxos is the issuer of stablecoin USDP and the custody platform behind the third largest stablecoin, BUSD. Their treasury consists exclusively of treasury bills, government bonds, and cash that would represent a value of $17.5 billion, according to their own report.
After Circle and Paxos have shared these figures, it’s waiting for Tether. for example,