CEO Behind $50 Billion Stablecoin Explains Why Not All Digital Dollars Are Created Equal

Jeremy Allaire is CEO of Circle, one of the primary issuers of the dollar-pegged USD Coin, one of the fastest growing stablecoins in the world. With a market cap north of $50 billion, USDC is closing in on the massive lead that Tether has long held. However, Circle is much more than just the issuer of a stablecoin. The company is using the token to build an entire financial ecosystem on top of multiple blockchains and offer simple tools for businesses to integrate USDC into their operations.

In an exclusive interview with Forbes, Allaire breaks down how stable coins are becoming integrated into the traditional financial system and to get a sense of how Circle is handling the added scrutiny that the entire industry is facing as a result of the Russia/Ukraine crisis. Additionally, Circle is back on the SPAC path again, reaching a new deal to go public with a $9 billion valuation.

This interview is excerpted from our premium research publication Forbes CryptoAsset and Blockchain Advisor. Subscribe today for more breaking news, exclusive insights, interviews and more.

Forbes: Can you give us a short overview of Circle’s main lines of business?

Jeremy Allaire: The most foundational part of the business is what we call our stablecoin market infrastructure business, which is best understood as the USDC product. We think about that as market infrastructure that is made available to any kind of market participant to integrate with and to use. It’s something that end users and developers and people building products and services can just integrate into their products. So unlike, say, a traditional business where everyone is a direct customer, we operate both a protocol and a digital currency. The goal is to get as many developers as possible, integrating with it as many apps and services connecting to it. By doing that, it increases the utility of the protocol. We have many types of partnerships that are aimed at getting greater use and distribution, the biggest of which is Coinbase, a launch partner of USDC. Coinbase makes it really accessible to the average retail end user. But now, with partnerships with firms like FTX, and NFT firms and DeFi protocols, it’s available in a lot of different ways. There is about $53 billion worth of USD Coin (USDC) in circulation, which on an equivalent basis would make us one of the 50 biggest banks in the U.S.

The next big piece is what we call our transaction services business. Maybe before even getting into that, at the core, we offer something called Circle Account, a free account available to businesses of all sizes that provides a way for people to connect banking, store and hold USDC, and convert and redeem it across multiple blockchains. With the free account, there’s also additional value-added products that we charge for. Our Treasury Services Product is our lending product, where a business can come in and they can lend us USDC. Or if they have dollars, they can convert into USDC, and then lend that USDC on a fixed term, like one month, three months, six months, 12 months or fixed rate, that turn and then we do wholesale lending behind that, and we pay interest on those USDC loans.

Forbes: How is the relationship between Circle and USDC similar or different to Ripple and XRP?

Allaire: A digital currency like USDC is very, very different. USDC is a stored-value payment instrument regulated by banking supervisors throughout the U.S. It has been since day one roughly four years ago in 2018. It’s the same regulations that regulate PayPal and Square Cash, and Apple Pay and Venmo. With all these, when you put dollars in, you get a 1:1 digital representation that you can then use in a digital application. We just happened to be issuing the stored value digital assets on blockchains instead of a closed loop, walled garden thing, like Venmo. We didn’t go and sell a token. There’s not someone who speculates on the value of USDC and it’s not used to pay for use of a blockchain. So, it’s very different from what I think of as native tokens of blockchains that are used for paying fees on a blockchain like ether, XRP monero or solana, or any of these tokens that are used for operating on a blockchain. We just sit on top; we’re like a layer above the blockchains.

Forbes: Let’s talk about USDC’s reserves. Recently you’ve changed the constitution to focus on cash and short-term government debt rather than commercial debt, etc. What was the thought process behind this change? Also, do you expect to go back to holding more short-term commercial debt and other types of assets based on a risk management profile that you’ve set up?

Allaire: Over the last year the market and regulators have looked at this space more closely and said, “Hey, this is growing really fast. This has the potential to be systemically scaled, and we want to make sure that stable value digital currencies are the safest possible for general use as a cash equivalent instrument.” Given the market and regulator demand, we made the change and have had a tremendous response. I think the interesting question embedded in your question is what does the future look like? I think that’s a policy question. And that is at the heart of the policy work that’s happening with the U.S. Treasury Department, Congress and in other places, which is what statutes are going to come into place for federally chartered and licensed stablecoin banks like Circle—we’re in the process of preparing to apply for a national bank charter. What’s important is that a stablecoin issuer is a full reserve bank. When you think about a traditional bank, if you have a Chase account, for example, you don’t actually have dollars, you have Chase dollars. Those are IOUs; you have a liability from Chase. If you have $1,000 in your bank account or checking account, you don’t actually have $1,000, you have a claim on $1,000. You really are effectively holding a lending book. That’s what we all know of as fractional reserve banking—they lend out the money eight times, ten times, and hopefully not everyone comes at once and wants their money back. But in case they do, there are all kinds of parameters put around the bank, what kind of assets they’re allowed to hold, and they have stress tests for things like what if there’s huge outflows over a 30-day period? Stablecoins right now are a lot simpler. You’ve got government, Treasuries and cash. And you’re not lending it out to anyone. There is no run risk in that sense. So, you don’t need FDIC insurance, because FDIC insurance was designed for fractional reserve banks. But you might want to have rules around what you are allowed to do with the reserves—risk perimeters—and here’s what we expect from you in terms of liquidity and meeting those liquidity requirements. That set of rules, the assets and the liquidity, and the risk management for stable value digital currencies, those have to get written. That form of bank charter has never existed and needs to get written. So that’s what we’re working towards.

Forbes: You recently testified in front of Congress. I’d love to get some of your key takeaways from that experience. Additionally, any insight on recent conversations coming out of the SEC, like the suggestion that stablecoins could be securities or on the implications that BlockFi’s $100 million settlement could have on your lending business? Coinbase, your partner, had publicly challenged the SEC regarding a lending product based on USDC, which it ended up not launching.

Allaire: I think it’s very clear and we’ve heard Chair Gensler make multiple statements that a cash equivalent regulated under the payments law/banking law model is not a security. I could imagine arguments being made about other stablecoins that are maybe synthetic in nature could be synthetic derivatives, or other stablecoins that are actively managing an investment portfolio that includes long running risk and other things could be looked at and treated differently because that’s operating outside of the stored value. We’ve always stayed defined in that payment system law. Lending products that are built using something like USDC, where a person is lending USD Coin and getting paid an interest rate on it is an investment contract. And if you’re not a bank and you’re offering that then you’re offering a security. That has always been our view and that’s why when we launched Circle Yield, which is a lending product where you lend USDC and you’re paid an interest rate, you’re purchasing a security, and that exempt security is filed with the SEC. We have risk disclosures, and we only make that product available to accredited investors and businesses.

Forbes: Let’s turn to the Russia/Ukraine crisis. Have you noticed any illicit use of USDC to evade sanctions or launder money.

Allaire: No, but I think there’s a couple things I can say. First, Circle has always run very strong compliance programs. We’ve been registered with FinCEN since 2014. We have scaled compliance programs, sanctions enforcement programs, and worked very closely with law enforcement to monitor and block any sanctioned entities or blockchain addresses. We also run our own deeper forms of analysis and detection. We work with networks of other exchanges, wallets and others on that as well. We have also seen a significant amount of USDC used in aid to Ukraine. We’ve launched our own programs around that as well, partnering with organizations that are able to do entity verification, organization verification, things like that. So that’s been really key. Because we don’t face the retail market directly ourselves. It’s not like we have account holders in Russia or things like that.

Forbes: What does it mean to block an address with USDC and does that impact any perceived notions of decentralization?

Allaire: We have a strict blacklisting policy, which is effectively if there is a fundamental risk to the integrity and security of USDC itself, Centre reserves the right to blacklist that address. That would be something like a system attack or if a binding court order is presented to Centre we can blacklist an address. This is not, “I sent stuff to the wrong address or a DeFi protocol got hacked, can you give me back my money?” There’s a huge moral hazard with that. And so it is really about law enforcement.

Regarding centralization concerns, Circle is a regulated financial institution that requires that certain controls are put in place. We have a hybrid model of operating on decentralized infrastructure. But there’s a centralized issuer, and that’s a feature for a lot of people even if it might be a bug to others. If you look specifically at the history here, there are an extraordinarily limited number of instances where this has happened.

Forbes: Can you walk me through the initial rationale for the SPAC and explain why it’s been delayed?

Allaire: Last spring, we made a decision to enter the public markets as a firm. There are lots of different reasons to become a public company. For us it falls into a few categories. First, it’s an opportunity to access the capital markets, raise capital, etc. Second, as a kind of financial market infrastructure, our belief is that being a public company and having the incremental regulatory requirements, which are very significant, is a really important signal to the market. Third, the special purpose acquisition company (SPAC) model offers a lot of attractive qualities to an entrepreneur, such as time to market. For a long while, the time to market on a public listing through a SPAC was three to five months instead of six to 12 months. That changed as SPACs received more scrutiny, especially some of the problematic ones. I think another challenge was simply that we are a fairly novel company with a fairly novel business in an area where there are core accounting risk regulatory questions, and the SEC is doing its job to ensure the right level of disclosure, risk accounting, regulatory, etc. Getting through SEC qualification is taking longer, which is fine. My view is that we’re going back and forth, we’re iterating through and will ultimately get through qualification and be a listed company, but it’s taking a bit longer than we had originally expected.

Forbes: With the amount of money being thrown around in private markets, did you ever think of holding off on going public? Why did your valuation now double to $9 billion?

Allaire: We are totally committed to being a public company. And given the significantly improved financial outlook for the next couple of years, we felt that the value of our company had clearly gone up. So, we revised the deal.

Forbes: When the deal was first announced, I was surprised to see that your Treasury and Transaction Services business brought in more revenue than interest on USDC holdings. According to some of your recent projections, you expect that trend to dramatically reverse. What led to this new outlook?

Allaire: A couple of things. USDC is continuing to grow rapidly and we are in a rising rate environment. These rising rates accrue directly to our income stream and our revenue. That’s reflected in the revision. Since the start of the year, we have added another $10 or $11 billion. Additionally, as we look forward, we’re seeing a lot of growth in the kinds of use cases where USDC is coming into play. And I think for us thematically, we’re seeing more and more traditional payments companies wanting to start using USDC. We’re seeing emerging interest from internet commerce use cases, which is exciting to see now that we can do fast, cheap, nearly instant USDC payments. And we’re starting to see interest from traditional finance (TradFi) looking at this as an improved way to do digital cash dollar settlement type stuff. So, I think it ties into a little bit of our business outlook for the next couple of years.

Forbes: Thank you.