Response to FUD: Circle CFO explains USDC reserve management and risk reduction

Foreword:

Recently, an insider who claimed to be @CryptoInsider23 disclosed the inside story of the so-called Circle (USDC). We also performed a simple analysis. The article just released by Circle CFO once again explained USDC’s reserve management, but did not explain to Cirlce Yield, who works closely with Genesis, but emphasized that “USDC’s reserves are separate from Circle’s other businesses and operations and are protected by laws and regulations. ".

The full text is as follows:

We aspire to digital assets being used by billions of people and generating trillions of dollars in transaction volume every day. This can only happen if the underlying currency is healthy, so our economic motivation is to minimize the risk of working with USDC. That's what we do. We minimize risk. Therefore, USDC can always be exchanged for US dollars 1-1.

"Your money is safe." Says the CEO of every financial institution in the world. Until the moment it's not safe.

I've written before that all financial institutions have inherent risk. That's why society has layers upon layers of laws and regulations designed to make them safer and protect consumers. "Safety" is a relative term, not absolute; there are always risks.

In addition to laws and regulations, such institutions rely on their risk management practices. In fact, taking and managing risk is their business model (e.g. a bank lends your money to borrowers or funds its trading desk; an unregulated institution can take as much risk as it likes).

"Our risk management capabilities are world-class," says every CEO of every financial institution in the world. Until they run out of money, the doors are closed and customers can't get their money back.

USDC is different.

For USDC, our business model is to minimize risk, not "take and manage risk". Let me explain why:

Providing Sound Money on the Internet

Just as billions of people use the Internet to exchange terabytes of data every day, we believe that one day billions of people will use the Internet to exchange trillions of dollars of value every day, almost instantly, and for free .

This will benefit everyone, unlocking billions of dollars in trapped value (e.g. T+2 settlement time), reducing economic rent (e.g. 6% fee on cross-border remittances, 3% fee on credit card transactions), accelerating financial Innovation in services (e.g., capital markets on long-tail chains) and financial inclusion (e.g., increased access to wealth storage), not to mention the unknown yet-to-be-invented forms of commerce and finance enabled by programmable on-chain currencies. This will benefit Circle - we aspire to be part of the underlying infrastructure and become a trusted service provider in this new financial ecosystem.

But all of this is only possible if the underlying currency is sound - robust, credible, and secure. And this can only come from minimizing the risks.

Minimizing the risk of USDC is our economic motivation. So here's what we did.

USDC reserves are protected by laws and regulations

When we first launched USDC, we had to convince regulators to regulate us. Today, Circle is regulated by state money transmission laws, while USDC is regulated as an electronic "stored value" vehicle. We follow laws and rules designed to protect consumers — the same laws and rules that other major payments companies follow, which collectively serve hundreds of millions of end users and millions of businesses.

Currency transmission laws state that Circle maintains legal ownership of USDC reserves but has no equitable interest, unlike banks or exchanges or unregulated institutions. This distinction is important.

USDC reserves are assets belonging to USDC holders, not Circle, and are all stored in separate accounts designated "for the benefit of USDC holders". Circle does not allow USDC reserves to be used for any other purpose. Unlike banks or exchanges or unregulated institutions, we can't lend them out, we can't use them to borrow money, and we can't use them to pay our bills.

In the most unlikely event of extreme stress, the segregated USDC reserves shall remain redeemable at par, protected from Circle creditors, and subject to state money transmission laws (e.g., Section 651 of the New York Banking Act) and applicable federal The protection provided by bankruptcy law (ask your bankruptcy attorney about the meaning of 11 USC §§ 541(b)(1) and 541(d)) is separation from the bankruptcy estate.

To be clear, USDC reserves are separate from Circle's other businesses and operations and are protected by law and regulation.

USDC reserves are managed to minimize risk

All of the choices we make about how and where we hold our dollar reserves are designed to minimize risk for dollar reserve holders, including counterparty risk (so that those institutions that hold dollar reserves return them), market risk (so that their value does not fluctuate), operational risk (so that everything runs smoothly), and liquidity risk (so that they are always available when needed).

We hold approximately 80% of our reserves in US Treasury securities with maturities of 3 months or less. The assets, considered among the safest in the world, enjoy the "full trust and credit" of the U.S. government, which itself is backed by the world's largest economy. They have the deepest and most liquid markets in the world, with stable prices and same-day redemptions. They were acquired by BlackRock and kept by BNY Mellon—two of the world's largest, most trusted, and most resilient financial institutions.

We hold about 20% of USDC reserves as cash in the U.S. banking system, and our partners include Silvergate, Signature Bank and New York Community Bank, etc. While most people (including us) consider Bank of America cash to be "safe," we also recognize that holding any amount of cash at any bank is subject to that bank's counterparty and credit risk. Therefore, we consider the bank's creditworthiness and asset concentration to further reduce risks. In addition, we continue to diversify our banking partners and are actively exploring additional ways to further reduce bank risk in U.S. dollar cash reserves. As we've said before, our long-term goal is to hold cash reserves directly at the Fed.

We hold cash in the banking system so that we can redeem USDC on request almost instantly. In fact, if customers have accounts with some of our banking partners, they will be able to mint, redeem, and settle USDC near-instantly, even when the US banking system is closed for business (most of the time). In June, we effortlessly converted $14.7 billion USDC into $14.7 billion USD for our clients through our robust liquidity operations infrastructure. We also released a lot.