Circle Internet Financial was already having a rough year due to the failure of Silicon Valley Bank, but the pressure on Boston’s top crypto company has only increased lately.
Last month, online payments giant PayPal announced a copycat of Circle’s main product. And while Congress made some tentative moves this summer to regulate crypto markets in ways that might benefit Circle, the legislation has become bogged down in partisan bickering and concerns from the White House.
A year ago, Circle was riding high thanks to increasing use of its “USDC” stablecoin. Unlike bitcoin and most cryptocurrencies, every dollar of USDC in circulation is backed by a dollar stashed in solid assets such as Treasury bills and bank deposits. Even amid the growing problems in crypto, the amount of USDC outstanding soared to more than $54 billion last summer.
And since Circle gets to keep interest generated from the backing assets, its profits soared, reaching $43 million in the third quarter of 2022, the company disclosed.
But after the failure of Sam Bankman-Fried’s crypto exchange FTX, slower activity in crypto markets meant less need for USDC, and the amount outstanding slipped to about $44 billion by March. Then came the Silicon Valley Bank failure.
Circle had $3.3 billion of the assets backing USDC deposited at SVB, or 8 percent of the total, and the funds were frozen by federal regulators when the bank failed. That led to an investor panic and USDC briefly traded for less than $1.
That prompted crypto traders to shift funds from USDC to its main competitor, Tether. Circle switched from keeping deposits at multiple medium-sized banks to relying on a single mega-bank (which it has not identified). Since the SVB failure, the amount of Circle’s USDC outstanding has dropped by $18 billion and Tether’s coin has gained $11 billion.
That’s strange, since the Tether stablecoin is invested in a riskier portfolio of assets that includes precious metals, bitcoin, and loans to Tether users, noted Stanford professor Darrell Duffie. “It is truly ironic that the more stable of the two biggest stablecoins has lost ground to the other,” he said.
Higher interest rates have also prompted users to invest excess cash in bonds or bank accounts instead of leaving it in USDC, which doesn’t pay holders any interest, BU lecturer and former bank examiner Mark Williams said. “Circle is a one trick pony, relying entirely on its stablecoin product for growth which recently has turned into its achilles heal,” he said.
Circle could have gotten a boost over Tether if Congress adopted a bill that emerged from the House Financial Services Committee in July to tighten regulation of the assets backing stablecoins. But while Republicans want to maintain a role for state regulators in stablecoin oversight, many Democrats see that as a loophole that would weaken federal oversight. And the White House also signaled opposition to state involvement, Punchbowl reported.
Last month, Circle got more bad news when PayPal unveiled its own stablecoin. PayPal’s new coin, dubbed PYUSD, will trade on the ethereum blockchain and be backed by bank deposits, US treasury bills, and other “cash equivalents,” the company said. The new coin is off to a modest start with only about $44 million outstanding so far, according to crypto tracker CoinMarketCap.
Circle tried to put a positive spin on the news. “”It is a strong signal that near-instant, borderless, and programmable payments in the form of stablecoins are here to stay,” a spokesman said. Circle is also letting users trade USDC on six more blockchains, which could help the coin take off if crypto market innovation catches on again.
Meanwhile, PayPal is regulated at the state level as a payments transfer service, Duffie noted, which he said was “not ideal.”
“Clearly, a legislative framework for digital payments that incorporates stablecoins is well overdue,” he said. “We should have federal regulation of payment services.”
Aaron Pressman can be reached at aaron.pressman@globe.com. Follow him @ampressman.
This news is republished from another source. You can check the original article here