#4 of a series on USDC Trust and Transparency, by Circle’s CFO, Jeremy Fox-Geen.
We aspire for digital assets to be used by billions of people to exchange trillions of dollars of value every day. This can only happen if the underlying money is sound. So our economic incentive is to minimize risk with USDC. So that’s what we do. We minimize risk. So that USDC is always redeemable 1-1 for US dollars. Always.
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“Your money is safe.” So says every single CEO of every single financial institution everywhere. Right up until the moment it isn’t.
I have written before that all financial institutions are inherently risky. That’s why society developed layers of laws and regulations designed to make them safer and protect consumers. “Safe” is a relative term, not an absolute; there is always risk.
In addition to laws and regulations, such institutions also rely on their risk management practices. In fact, taking and managing risk is their business model (e.g., a bank lends your money out to borrowers or funds its trading desks; an unregulated institution can take as much risk as it wants).
“Our risk management capabilities are world class,” is the other thing said by every single CEO of every single financial institution everywhere. Right up until they aren’t, when doors are shut and customers can’t get their money back.
USDC is different.
With USDC, our business model is minimizing risk, not “taking and managing risk.” Let me explain how, and why:
Delivering sound money on the internet
Just like billions of people use the internet to exchange trillions of bytes of data each day, we believe that billions of people will one day use the internet every day to exchange trillions of dollars of value, near-instantly, and nearly for free.
This will benefit everyone, releasing billions of dollars of trapped value (e.g., T+2 settlement times), reducing economic rents (e.g., 6% fees on cross-border remittances, 3% fees on credit card transactions), accelerating financial services innovation (e.g., long-tail on-chain capital markets) and financial inclusion (e.g., increased access to wealth storage), not to mention the unknown not-yet invented forms of commerce and finance enabled by programmable on-chain money. It will benefit Circle - we aspire to be part of the underlying infrastructure and a trusted service provider within this new financial ecosystem.
But all this can only happen if the underlying money is sound - robust, trustworthy, safe. And that can only come from minimizing risk.
Minimizing risk with USDC is our economic incentive. So that’s what we do.
USDC reserves are protected by laws and regulations
When we first launched USDC we had to persuade regulators to regulate us. Today, Circle is regulated under state money transmission laws, and USDC is regulated as an electronic “stored value” instrument. We follow laws and rules designed to protect consumers - the same laws and rules as followed by other major payments companies that collectively serve hundreds of millions of end-users and millions of businesses.
Money transmission laws provide that Circle maintains legal title to the USDC reserves, but does not have an equitable interest, unlike a bank or exchange or an unregulated institution. This distinction matters.
USDC reserves are assets that belong to USDC holders, not Circle, and are wholly held in segregated accounts designated “for the benefit of USDC holders.” Circle is not allowed to use the USDC reserves for any other purpose. Unlike a bank or an exchange or an unregulated institution, we cannot lend them out, we cannot borrow against them, and we cannot use them to pay our bills.
In the most unlikely and extreme stress case of a Circle bankruptcy, segregated USDC reserves should remain redeemable at face value, shielded from Circle creditors, and separated from a bankruptcy estate per the protections afforded under state money transmission laws (e.g., Section 651 of the New York Banking Law) and applicable federal bankruptcy laws (ask your bankruptcy counsel about the meaning of 11 U.S.C. §§ 541(b)(1) and 541(d)).
To be clear - the USDC reserves are separate from the rest of Circle’s business and operations and are protected by laws and regulations.
USDC reserves are managed to minimize risk
All the choices we make about how and where we hold the USDC reserve are designed to minimize risk to USDC holders, including counterparty risk (so that those institutions holding USDC reserves give them back), market risk (so that they do not fluctuate in value), operational risk (so that everything works smoothly) and liquidity risk (so that they are always available upon demand).
We hold approximately 80% of USDC reserves in U.S. Treasury bills with durations of 3 months or less. These are considered among the safest assets in the world, backed by the “full faith and credit” of the U.S. government, itself backed by the world’s largest economy. They have the deepest, most liquid market in the world, are price stable, and redemptions can settle on the same day. They are purchased by BlackRock and held in custody at The Bank of New York Mellon - two of the largest, most trusted, most operationally resilient financial institutions globally.
We hold approximately 20% of USDC reserves as cash within the U.S. banking system, with partners including Citizen's Trust Bank, and New York Community Bank, among others. While most people (including us) consider cash in a U.S. bank to be “safe,” we also recognize that holding any material amount of cash at any bank carries exposure to the counterparty and credit risk of that bank. Hence we consider bank credit-worthiness and asset concentration to further minimize risk. Moreover, we continue to diversify our banking partners, and are actively exploring other ways to further reduce bank risk within the cash portion of the USDC reserve. As we’ve said before, our long-term goal is to hold cash reserves directly with the Federal Reserve.
In the month of June, we seamlessly redeemed 14.7 billion USDC for $14.7 billion U.S. dollars for our customers, without fuss or fanfare, through our robust liquidity operations infrastructure. We issued a lot as well.
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We aspire for digital assets to be used by billions of people to exchange trillions of dollars of value every day. This can only happen if the underlying money is sound. So our economic incentive is to minimize risk with USDC. So that’s what we do. We minimize risk. So that USDC is always redeemable 1-1 for US dollars. Always.
Continue reading our Trust & Transparency series.
