How is USDC Governed?
If you’re the kind of person who skips to the end of detective novels, I can reveal that USDC (USD Coin) is governed by a consortium called “CENTRE”, which was founded by Coinbase exchange, and financial technology company Circle.
USDC stands for USD Coin. It’s an example of a “stablecoin” – that is, a coin/token in crypto that has a value fixed to an external asset rather than being determined by buys/sells in the market. One USDC is worth $1, and is redeemable for a dollar, but because it’s a fully-fledged crypto token, it can be used to represent the dollar whenever transactions or exchanges are made.
Having representations of real-world assets such as the US dollar inside the blockchain/crypto ecosystem is vital, especially since there are very few government-issued stablecoins that do the same job. Because most spending is still done by converting to a country’s legal tender, it’s vital to know how much everything is worth. Of course, the dollar being the world’s reserve currency means that dollar values are all-important.
How do USDCs come to exist? How can something that appears out of thin air be worth a dollar?
USDCs are issued and/or burnt (the opposite of being issued) as the need arises. Unlike regular cryptos, they don’t need to be mined or earned, because when they’re issued, they are already backed by assets.
Although USDC is an open-source project with the code used to run it fully viewable, management of the coin is wholly centralised in the hands of Centre, a governing consortium founded by Coinbase (an exchange) and Circle (a fintech). Minting and burning are handled by Circle itself.
USDC and Regulation
USDC is the biggest regulated stablecoin.
According to Coinbase:
“Circle, the issuer of USDC is a money services business registered with FinCEN and 46 state regulators. Reserves are reported to the states pursuant to money transmission laws. Circle, and hence the reserve, is audited by Grant Thornton, a leading global accounting firm.”
It’s worth noting that every month Grant Thornton put out an “attestation” of USDC: a statement documenting what they believe is the status of the reserves behind the coin. That’s not an audit: audits take forever. An attestation is a statement by the auditors of what they believe the coin’s financial status is, working off the information they’re given. It has been audited previously though.
So, USDC is regulated and audited.
But what gives it an advantage over the regular dollar? Well, it’s fast. Transmitting USDC is much faster than transmitting regular US dollars. This means it is the fastest regulated and audited way to transfer dollar funds from A to B (and beyond).
There are a few different reasons why you’d use USDC.
To escape from crypto volatility
It’s no secret that crypto coins and tokens are volatile because small markets (or relatively small markets) mean big trades have even bigger consequences. USDC is stable against a real-world value, and trading into it is like jumping from a fast-moving block onto a stable platform in a Mario game.
To move assets into the US dollar
Setting up a US bank account can be a monster affair for non-US citizens, and impossible for some. For customers in some countries such as the UK, the process has become a little easier with companies such as Wise offering USD balances and US bank details. However, it’s still easier to simply own USDC or exchange assets into it than it is to deal with American banks and the traditional financial system.
Sometimes someone just gets a hankering for the dollar, and USDC allows easy conversion to that. Maybe they might appreciate that there’s less inflation in the US than their local currency and so see USDC as a hedge against inflation! Maybe their local currency isn’t that stable or reliable.
To send funds
Everyone accepts dollars. USDC is a great way for companies to settle international financial transactions without the hassle of engaging with SWIFT or equivalent. It means invoices can be issued in US dollars and paid in them.
USDC is one of the most sought-after coins to borrow in decentralised finance, too, because borrowers can use it for all of the other reasons listed here!
These days if you need to fund a global project you’re cutting off your nose if you don’t do it in a currency that people worldwide can understand. Startup companies and non-profit organisations find it much easier to raise funds in dollars, and even easier to raise them on the blockchain in USDC. Raising funds in crypto means you can never rely on the value of the funds, but USDC gives certainty.
Stable price pegging
If traditional finance moves lock, stock and barrel to the blockchain, it will be bringing its US dollar values with it. Equity ownership, fund investments, liabilities and debt would also need to be denominated in US dollars. There may come a time when there’s another default currency for this, but that day isn’t today.
Cross-blockchain asset transfer
USDC started on the Ethereum blockchain but is now compatible with four more: Solana, Algorand, Stellar and Tron, all blockchains designed to compete with Ethereum.
While USDC’s value is going nowhere (by design), there are yield-bearing crypto accounts that give substantial interest on USDC. AQRU offers two options for USDC investment and numerous ways of buying it.
Recent developments and the future
DeFi (decentralised finance) is going through a rough patch at the moment, but none of that has damaged USD Coin. What it has done is draw attention to the poor design or dodgy asset backing (or both) of various other stablecoins competing for investor money.
What’s crystal clear is that regulation is beginning to catch up with cryptocurrency, and unregulated coins will either be relegated to a much smaller market or be pushed out. That’s if they don’t collapse first, like the algorithmic stablecoin pair UST/LUNA, or get knocked off their $1 value due to market conditions.
Many of these coins seem to have been designed as thought experiments with little attention paid to regulations, securities law or investors. USDC is different and will remain so.
An ecosystem where you have over 15,000 coins and over 500 exchanges is unsustainable. When consolidation happens it’s going to be wide-reaching and change crypto and DeFi forever. You’re seeing the first signs of it now as assumptions DeFi funds made about the future are proving wildly wide of the mark.
So, stay safe with USDC!