Stablecoin: USDC after the Silicon Valley Bank

Circle, the Boston-based financial technology company and issuer of the USDC stablecoin, recently survived the failure of Silicon Valley Bank (SVB).

As a result of this experience, Circle has requested that its USDC stablecoin be backed by the US Federal Reserve with its US dollars held at the Fed.

USDC stablecoin’s request to the Fed to survive the collapse of Silicon Valley Bank

Circle‘s request to have its USDC stablecoin backed by the Federal Reserve stems from the belief that such backing would provide greater stability and security for the company and its customers.

Currently, the USDC stablecoin is backed by a reserve of US dollars held by Circle and its partners, which Circle believes is vulnerable to market fluctuations and other risks.

In contrast, Circle believes that backing the USDC stablecoin with US dollars held at the Federal Reserve would provide a level of security not currently available.

This would ensure that the stablecoin is fully backed by safely and securely held U.S. dollars and that the stability of the stablecoin does not depend on the financial health of any single institution.

At a recent conference of the Gillmore Centre for Financial Technology, Circle emphasized its belief that regulation is required to make it a federally supervised full-reserve institution.

This would mean that Circle would be subject to regulatory oversight by the Federal Reserve and would require the company to hold sufficient reserves to cover all of its liabilities.

Circle’s request for increased regulation and supervision reflects its desire to provide customers with the highest possible levels of security and stability.

Being subject to regulatory oversight, Circle would be required to adhere to strict standards of financial security and safety and would be subject to ongoing monitoring to ensure compliance with those standards.

The conference at Warwick Business School

At the recent conference held at Warwick Business School, Tarleton Watkins, vice president of Circle, a fintech company specializing in stablecoins, discussed the potential long-term solution for retail stablecoins.

Watkins suggested that a wholesale Central Bank Digital Currency (CBDC) at the Federal Reserve could be used as a backstop for stablecoins.

This could provide a more secure and stable option for users, as the CBDC would be backed by the full faith and credit of the US government. However, in the short term, Watkins advised stablecoin issuers to hold dollar reserves with the Fed instead of relying on various financial partners.

This recommendation comes in light of the recent failure of Silicon Valley Bank (SVB). By holding dollar reserves at the Fed, stablecoin issuers can ensure that they have access to the liquidity needed to maintain the stability of their stablecoins.

Overall, Watkins’ insights into the potential long-term solution for stablecoins and his recommendation to hold dollar reserves at the Fed highlight the importance of providing the stablecoin market, especially in light of recent events in the cryptocurrency market, with a solid foundation to move forward.

Watkins added:

“Regulatory clarity for novel financial products and services like USDC can provide greater incentive for traditional financial institutions to incorporate digital assets onto their balance sheet. Digital currencies should be fully reserved with high quality liquid assets, i.e. cash and short duration government obligations.

They should also be prudentially regulated and supervised by federal or national regulators at the central bank level or equivalent. Digital currency issuers should have direct access to accounts at the central bank.”

In a talk on CBDCs and stablecoins at the conference, Ganesh Viswanath Natraj, assistant professor of finance at the Gillmore Centre for Financial Technology, supported the idea of central banks and stablecoin providers working together.

He said:

“If stablecoins can be backed by digital pounds or dollars held entirely with a central bank, the central bank could then regularly audit stablecoin providers’ reserves and impose capital requirements.

If issuers were holding a certain percentage of liquid digital currency reserves at the central bank, this would ensure they had funds to process redemptions. The central bank could also provide insurance for customers and having its backing would reduce the risk of a run on the stablecoin.”

During the conference, several experts took the floor to talk about various topics related to the cryptocurrency world. Anastasia Melanchrinos, representative of cryptocurrency market data firm Kaiko, spoke about DeFi and CeFi.

Founder of analytics platform Block Scholes, Eammon Gashier, spoke about cryptocurrency derivatives, while Nick Merritt, of metaverse platform Vault Hill, presented the growing metaverse sector. Amit Chaudhary, representing app builder DeFi Polygon, presented research on DeFi’s liquidations.

Cynthia Campbell, from the Alberta Securities Commission of Canada, and Amila Dissanayake, from the cryptocurrency analytics firm Chainalysis, explained the problem of fraud and scams plaguing the cryptocurrency sector.