Circle is a Fintech that is best known for its dollar-based stablecoin, USDC, that has grown rapidly in recent months. Today, USDC is the second most popular stablecoin following Tether, with a market cap of over $27 billion. While about half the size of Tether (USDT), Circle has not suffered any of the regulatory and legal scrutiny Tether has had to endure as Circle has always focused on being a compliance-first digital operation that sought out regulatory approval before entering the marketplace.
Earlier this year, Circle announced its intent to become a publicly listed firm in a SPAC deal valued at around $4.5 billion. Concord Acquisition Company will be acquiring Circle at some point in the coming months (or weeks) in a deal that includes $415 million in PIPE financing. It is anticipated that Circle will have access to over $1.1 billion in gross proceeds upon the close of the SPAC transaction – a solid war chest for building out the company or, perhaps, buying other ones.
To add even more interest to the public listing is the fact that Circle recently revealed its intent to become a federally chartered bank. In a blog post, Circle said it had always sought the “highest of regulatory standards,” and has always exceeded “the bank-grade LCR and HQLA requirements under Basel III” as it moves forward with the chartering process. Becoming a bank is an arduous task at best as the scrutiny is intense but if approved, the rewards for Circle and its future operations may be immense.
While Circle appears to be on a solid trajectory for Fintech success some policymakers worry about the rise of stablecoins and the potential for systemic risk. Last month, the Secretary of the Treasury Janet L. Yellen convened the President’s Working Group on Financial Markets (PWG) to discuss stablecoins. The meeting reviewed possible risks as well as recommendations to manage any risk. Written recommendations are expected to follow later this year.
Simultaneously, central bank digital currencies (CBDC) are a hot topic within the halls of government banks around the world. But if governments issue CBDCs will there be a need for privately issued digital dollars and euros?
The government of China, a country that is already experimenting with a digital yuan, believes that stablecoins “pose serious risks to the global financial system” while noting its digital yuan suffers none of the shortcomings of private digital currency.
According to a report in Nikkei Asia, Fan Yifei, Deputy Governor of the People’s Bank of China, believes stablecoins (and other crypto) have become tools for illegal activity and money laundering. Of course, the digital yuan is also being touted as an alternative to the dollar which has long held the top spot as the worlds’ reserve currency.
In June of this year, Federal Reserve Vice Chairman Randy Quarles had a different perspective on stablecoins. The Fed official stated “the combination of imminent improvements in the existing payments system such as various instant payments initiatives combined with the cross-border efficiency of properly structured stablecoins could well make superfluous any effort to develop a CBDC.”
So which is it?
Dante Disparte, Chief Strategy Officer and Head of Global Policy at Circle, recently composed an article supporting the creation and utilization of stablecoins stating that:
“… ironically, despite all the histrionics over the threat that cryptocurrencies will disintermediate the financial system, destabilize markets, and circumvent compliance rules to prevent financial crime, the crypto industry is pulling banking into the twenty-first century.”
Disparte also cautioned central banks from rushing to create a CBDC that may eliminate the need for retail banks while providing a back door to individuals’ financial transactions – raising privacy concerns.
“…there should be a safety gap between central banks, the market, people, and their money,” said Disparte.
As dollar-based stablecoins have topped $100 billion in circulation regulators and policymakers are justifiably concerned. But is this more a question of semantics?
Most transactions that take place today are via an ACH, a credit/debit card, etc., or in other words – digital money. Disparte noted that:
“Lost in that narrow framing is the fact that most value-added money in circulation today already rides on private or consortium-led rails. Moreover, when properly designed and regulated, privately issued dollar digital currencies do not undermine any of the central tenets of the financial system, including the presumption of financial privacy, economic soundness (in terms of prudential asset management), and the availability of a widely used means of payment, unit of account, and store of value on the internet.”
Recently Crowdfund Insider spoke with Disparte about the rise of the stablecoin as well as the future of Circle and USDC. Disparte explained that Circle is not focusing on being number one in the Stablecoin race adding that not all stablecoins are created equal:
“We are trying to be number one at building institutional grade, trusted, internet native financial infrastructure.”
Circle wants to power crypto native trading for institutions, credit card transactions, and more, while emerging as a comprehensive digitally native financial services firm.
Regarding the possibility of a dollar-based CBDC, Disparte says that CBDCs and stablecoins are not at odds with each other. Circle agrees that stablecoins must be highly regulated and Disparte posits that no central bank wants to run a science experiment on money and no central bank necessarily wants to have a retail relationship with consumers – not to mention the challenge to the two-tiered banking system that has been the bedrock of financial services for many decades.
“There is a lot of nuance and complexity in the CBDC discussions,” Disparte said.
In June of this year, Disparte actually published an article outlining the ten different reasons as to why CBDCs are not a good idea, obviously supporting a competitive market for regulated, private stablecoins.
Along with Circle’s deep commitment to financial integrity, the company is seeking to modernize the private sector rails that are already in existence while setting a standard for others.
“The vast amount of money in circulation today … is value added because of private sector payment rails.”
In brief, the past is prologue, when it comes to the future of money. Circle is modernizing core infrastructure, “ironically, there is nothing new here,” said Disparte. It is just better and Circle wants to do it with a deep commitment to financial soundness. The big difference is they are building on blockchain.
“No prudent regulator wants to kill stablecoin innovation they just want to bring them into the line of sight on prudential standards…”
Disparte said there are very clear guardrails today for this industry. And if you don’t like Circle then you don’t like PayPal… and you don’t like very large, regulated payments companies.
Regarding the pursuit of a bank charter, a move that if successful will allow Circle to operate in all 50 states while providing banking services, Disparte said becoming a fully chartered commercial bank was always the goal of Circle’s CEO and founder Jeremy Allaire. It is the right evolution for the company, said Disparte, “we are at the end of the beginning.”
Disparte said there is a need for a nationally conforming approach to regulating digitally native banks. Circle is building for the future by being regulatory compliant and that trust should start to compound.
He is worried about the regulatory environment in the US – similar to what other industry insiders have expressed. The recent infrastructure legislation that targeted the crypto industry in a ham-fisted fashion showed a severe lack of understanding by its authors in the US Senate. In a recent article posted by Disparte he said that the “provisions were flawed,” and the “overreach on which entities should be reporting intermediaries in a cryptocurrency transaction is the most troublesome.” Disparte stated:
“It would negate the market reality that crypto trades and transactions are increasingly flowing to (and through) well-regulated firms and exchanges. What underpins both of these issues is the broad perception that crypto equals circumvention of financial rules and is a haven for nefarious actors bent on eroding U.S. national security through anonymous payments and new forms of Internet hot money that make ransomware possible. On both scores, correlation does not equal causality, and critics fail to acknowledge the broader consumer privacy erosion that takes place in core financial services without enhancing national security.”
Disparte believes that regulators actually understand this industry is here to stay and that policymakers really do want to keep this industry in the United States (and not force it to move elsewhere).
Regarding the forthcoming SPAC deal which is currently on track, Disparte could share little due to regulatory requirements but he sees SPACs as a pathway for a controlled entry into the public market as well as an entry for institutional investors. SPACs are “an important innovation in capital markets” and a strategic option that can bring with it substantial backing. More than 50% of public firms have entered the markets via a SPAC in recent years, said Disparte.
Going forward we will have to wait for quarterly reports and public statements but clearly, Circle wants to be more than the world’s payment rails facilitating instant, trusted transfers and payments. Perhaps the world’s largest digitally native commercial bank – minus all of the fees and silly charges currently assessed by the incumbents? Now that makes a lot of sense.
This interview is part of a series looking at how Fintech firms have adjusted their approach or portfolio of products and services to meet the challenges of delivering during a global pandemic.
The series has been created to support The Global COVID-19 Fintech Market Impact & Industry Resilience Study being carried out by the Cambridge Centre for Alternative Finance at the University of Cambridge Judge Business School in partnership with the World Bank and the World Economic Forum.
The study aims to assess the short to medium-term impact of the pandemic on FinTech firms, how they have performed and responded to changing customer requirements and how the regulatory response has affected development and growth.
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