Dialogue Circle CFO: How does USDC stabilize during the "earthquake"?

Author: Max Parasol, Decrypt

Original Title: 《Stablecoin Provider Circle Eyes Public Listing in Q4 This Year: CFO》

Compiled by: Katie Gu, Odaily Planet Daily

In response to rumors that USDC would follow in the footsteps of Terra, Circle's Chief Financial Officer (CFO) Jeremy Fox-Geen spoke with Decrypt to unveil the mystery surrounding the second-largest stablecoin in the market.

Circle's Financial Status

Last week, the second-largest stablecoin company Circle released its first complete monthly list of assets backing the token. The stablecoin issuer emphasized that its USDC reserves are currently held entirely in cash and 3-month U.S. Treasury bills, completely independent of the company's operations. According to the company's report, as of June 30, the total circulation of USDC was $55,569,519,982, while the total reserve assets backing the dollar-pegged tokens amounted to $55.7 billion.

Of this, Circle has $13.58 billion in cash held at regulated U.S. banks, such as Silvergate Bank, Bank of New York Mellon, and Silicon Valley Bank. Currently, there is also $42.1 billion in U.S. Treasury bills.

Fox-Geen pointed out in an interview with Decrypt that Circle operates as a registered financial services company in the U.S., under the same regulatory framework as payment companies like Apple's Apple Pay, mobile payment service Venmo operated by PayPal, or the U.S. mobile payment giant Block's Cash App (similar to Alipay). Fox-Geen stated that Circle's operational framework has gained the trust of the market and has been adopted by the largest payment companies, protecting billions of dollars in individual accounts.

The Impact of Terra's Collapse and Liquidity Crisis on Circle

Regarding Circle's losses, Fox-Geen stated: "Because Circle is paying rewards to its reserve holders, some of whom use those funds to mint new USDC tokens. The accusations of losses against Circle are FUD, many of which are not only speculative but also inaccurate. Those spreading these rumors do not understand how banks operate. Circle does not pay any bank fees for holding fiat currency. Banks pay interest to customers for holding fiat currency."

He mentioned that even if Circle had such an agreement with a bank, it would be fully recorded and disclosed in the public documents submitted to the SEC (U.S. Securities and Exchange Commission), which can be downloaded from the SEC website. "If it doesn't exist, it's because it doesn't actually exist. Because if it did, as a U.S. financial services company registered with the SEC, we would have to disclose it and face penalties, including for individual company executives," Fox-Geen added, "In fact, all materials from our company have been recorded and fully disclosed." However, Circle's CFO also believes that concerns are valid in light of the collapse of the Terra ecosystem and the liquidity crisis many companies currently face, as these companies often use USDC in their operations.

The recent turmoil in the industry began in May with the collapse of Luna and UST, leading to at least $55 billion in investor wealth evaporating from the market. In the following weeks, cryptocurrency lending company Celsius froze withdrawals on its platform and eventually filed for bankruptcy, while cryptocurrency brokers Three Arrows Capital and Voyager Digital faced similar predicaments.

However, Fox-Geen denied that Circle has any exposure to these companies, as the law "clearly requires that USDC reserves can only be held in certain financial instruments."

"We cannot lend them money or borrow from them, nor can we use that money to pay bills. According to the currency circulation law, these reserves are kept in separate accounts to protect the interests of USDC customers." Under U.S. bankruptcy law, USDC reserves can receive the protections provided by the legal regulations of all other major mainstream payments.

When asked if any crypto lending companies had requested to borrow from Circle's USDC reserves, Fox-Geen stated that although he has only been at Circle for 18 months, he has never heard of such a thing happening in the history of stablecoins. He stated: "Circle has always made it clear that the reserves of USDC cannot be used for any other purpose."

Circle Launches Yield Rate Product ------ Circle Yield

Fox-Geen also emphasized that Circle Yield is the company's short-term and long-term yield rate product aimed at institutional investors, which may serve as an entry point for many Circle customers into the digital asset market. Circle aims to ensure that it is supervised and regulated, and "to ensure that the risks it undertakes are as minimal as possible."

Fox-Geen stated: "Circle Yield is issued as an unregistered security under U.S. securities law, which is the standard way of issuing such products. If we dig deeper, we find that the SEC or state regulators have sanctioned many people for not complying with U.S. yield product laws during the issuance process. Therefore, we must find a regulatory body that can oversee digital assets or any lending products."

Since last year, crypto lending companies, including Celsius and BlockFi, have been targets of the SEC and regulators in New York, New Jersey, Texas, and other states, receiving cease-and-desist orders or paying hefty fines.

Notably, the actual regulatory body for Circle Yield is the Bermuda Monetary Authority (BMA), and Fox-Geen stated that the BMA helped Circle pass rigorous scrutiny.

The core feature of Circle Yield is that the product is reportedly fully collateralized by Bitcoin. Fox-Geen emphasized that the product is also over-collateralized, "which is not how most crypto lending businesses operate."

How Does Circle's Over-Collateralization Work?

Fox-Geen explained: "When we lend USDC to our borrowing clients, the borrowing clients will provide us with collateral worth 125% of the value of the Bitcoin loan, which is held by an independent collateral agent with a well-established security interest." If the loan defaults, Circle has the right to obtain that Bitcoin.

What happens if the price of Bitcoin falls?

Circle stated that to ensure over-collateralization, it uses margin call notifications. This notification occurs twice a day.

"For example, if the value of Bitcoin drops from 125% to 100% or lower, we will issue a margin call notification to the clients borrowing USDC from us. They will then deposit more Bitcoin, and we must bring the collateral value back to 125%. Similarly, if Bitcoin rises, they can reclaim some collateral to maintain it at 125%."

In the latest fluctuations in the cryptocurrency market, Fox-Geen stated that this mechanism "performed exactly as expected throughout the process." Margin call notifications were issued promptly, Circle Yield remained over-collateralized, and clients did not suffer any losses.

He also acknowledged that Circle Yield's current interest rates have dropped from an initial 10.75% in November 2020 to 0.5% for both short-term and long-term fixed income, which is not very attractive, and there is currently little demand for borrowing USDC. Fox-Geen stated: "This is because corporate financing rules apply to the digital asset market just as they do to all other asset markets. As the market stabilizes, interest rates will change."

Circle to Become the Next Crypto Company to Go Public After Coinbase

Regarding Circle's plans to go public through a SPAC agreement signed with Concord Acquisition Corp. last year, Fox-Geen expects this process to be completed in the fourth quarter of this year. Currently, the S-4 document containing all information about Circle is under review and comment by the SEC, with the latest revised document published last Monday.

Fox-Geen explained: "If a company applies for a traditional IPO, this process is conducted privately, and everything will be disclosed at the end of the process. However, going public through a SPAC transaction means the entire process is public. Crypto is a novel industry, and Circle is a novel company, and the SEC's job is to ensure the completeness and accuracy of information disclosure." Currently, Circle is still under a joint review process with the SEC.

The listing process takes longer for crypto companies, as exemplified by Coinbase. The SEC controls the listing progress, and Circle's current expectation is to become a public company in the fourth quarter of this year.