Since inception, Circle has intended for USD Coin (USDC) to be the most transparent and trusted dollar digital currency. We remain committed to transparency and trust, and will continue to enhance reporting and disclosure with simple, clear and frequent updates. Visit buildonusdc.com to learn more.
Since inception, Circle has intended for USD Coin (USDC) to be the most transparent and trusted dollar digital currency. We remain committed to transparency and trust, and will continue to enhance reporting and disclosure with simple, clear and frequent updates. Visit buildonusdc.com to learn more.
We are sometimes asked: “Why does Circle publish attestations of the USDC reserve, why not an audit?”. This is important, and the short answer is that we do both. We explain why, and the difference between them, below.
An audit is an assurance engagement that verifies the accuracy of financial statements and is typically performed annually by a public accounting firm.
The USDC reserve, which is reported as part of Circle’s financial statements, has been audited annually since launch in 2018 by a leading global accounting firm as part of Circle’s annual financial statement audit. The audit verifies the accuracy, completeness and composition of the reserve and tests the internal controls over financial reporting that ensure financial statement accuracy.
The audits for 2021 and 2020 have been filed publicly with the SEC as we prepare to become a public company listed on the New York Stock Exchange. Circle expects to continue to publish quarterly financial statements (reviewed by our auditors) and annual audited financial statements.
In addition to the annual audit, Circle has published, since the launch of USDC in 2018, monthly statements of the size and composition of the USDC reserve, confirming that the reserve is at least as large as the amount of USDC in circulation. Our auditor performs a monthly examination of account balances (for the reserve) and on-chain totals (for the amount of USDC in circulation) in order to provide robust third-party assurance to the USDC ecosystem as to the accuracy of these statements.
This type of assurance engagement is called an attestation – the accounting firm “attests” to the accuracy of a set of statements. It is different from an audit (it makes little sense to test financial controls monthly, for example), but it provides the same standards of assurance over the statements.
Circle’s disclosures go beyond what is required under existing financial regulation. In addition to our audits and attestations, we recently began publishing weekly data as to the size and composition of the USDC reserve and the amount of USDC minted and redeemed. We have repeatedly urged policymakers and regulators to require regular disclosures of stablecoin issuers, and are committed to finding additional ways to enhance transparency.
Recent events have demonstrated several times, with the full force of the capital markets, the importance of strong risk management, and ample liquidity in particular, in order to help protect consumers and build ecosystem trust.
Institutions that provide borrowing and lending services are inherently risky. They take credit risk (borrowers might not pay back loans), market risk (collateral securing a loan might fall in value), duration risk (the mismatch between longer-term loans and shorter-term deposits), among other risks. Moreover, they are typically highly leveraged (fractionally reserved not fully reserved).
These risks combine to create significant liquidity risk – the risk that the institution is unable to pay back its depositors upon demand and its debts when due. Such institutions have a long history of runs, failures and insolvencies, which is why our communities over time have developed a robust financial regulatory framework to help protect consumers and build trust. Robust regulation of financial institutions is a very good thing.
Circle is a regulated financial institution, issuing USDC under US state money transmission laws, and is subject to the oversight of state banking supervisors, among others.
USDC is always redeemable 1 for 1 for US dollars. Any amount. Always. Period.
We can make this assertion confidently because USDC is fully reserved with short-dated US Treasuries (~80%) and cash (~20%), denominated in US dollars, and held directly with leading US financial institutions and custodians within the US regulatory perimeter. Short-duration US Treasuries are the safest, most price stable, most liquid assets available in the world – they have the highest credit rating and the deepest trading markets (trading over $650 billion each day).
The USDC reserve does not contain any other high risk, less liquid assets such as digital assets, private or public equity, loans secured or unsecured, commercial paper of any kind or credit rating, assets denominated in currencies other than US dollars, or assets held with third parties subject to lock-ups or other restrictions upon liquidity.
Over the last 1 week, 1 month, 3 months and 12 months (as of 9am EDT today), Circle has redeemed $3.5 billion, $17.7 billion, $50.7 billion, and $108.4 billion USDC for US dollars for Circle customers. We have issued a lot as well! We will soon add more analysis of liquidity and redemptions to our website disclosures to further enhance USDC transparency.
We manage the USDC reserve this way with the intent for USDC to be the most trusted, transparent dollar digital currency. Always redeemable 1 for 1 for US Dollars. Period.
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.
“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:
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.
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.
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 Silvergate, Signature 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.
We hold cash in the banking system so that we are able to redeem USDC near-instantly upon request. Indeed, if customers have accounts with certain of our banking partners, they are able to near-instantly mint and redeem and settle USDC 24/7/365, even when the U.S. banking system is closed for business (which is most of the time). 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.
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.
We built Circle Yield to meet the expectations of our most demanding customers. During these unprecedented times, it has continued to perform – all margin calls have been met and neither Circle nor any customer has incurred any loss. Yet we recognize that some may wish to minimize their exposure to digital assets at this time. So we have offered all customers with active loans the opportunity to withdraw their USDC from Circle Yield, early, without penalty.
Just like billions of people use the internet to exchange trillions of bytes of data each day, we believe that billions of people will eventually use the internet to exchange trillions of dollars of value every day, near-instantly, and nearly for free. This will benefit everyone, releasing billions of dollars of trapped value, reducing economic rents and accelerating financial services innovation and inclusion.
Yet much of this future financial infrastructure of programmable money has yet to be invented, nor have the new forms of commerce it will enable. We intend to play a meaningful role, building on the products and services we offer our customers today, and we aspire for well-regulated stablecoins like USDC to be foundational to this future. (For clarity, the USDC reserve is entirely separate from Circle’s other products and services, and is protected by laws and regulations — see Minimizing Risk).
One of those products is Circle Yield, our first treasury product, which we offer to businesses and accredited investors only — not retail consumers. Our lending customers lend us their USDC for a fixed term (1, 3, 6 or 12 months) for a fixed return. Our lending partners borrow that USDC for the same fixed term for a fixed cost.
We built Circle Yield to meet the expectations of our most demanding customers – both crypto-native and non-crypto businesses alike. After all, when you (literally) give someone your money on the promise of a return, you had better trust to whom you have given it and understand the structure of the product itself. If that promise sounds too good to be true, well, it likely is too good to be true. You might start by asking: 1/ is it secured, 2/ is it full-reserve, 3/ is it regulated, 4/ is it legal?
1/ Circle Yield is overcollateralized, to offer our lenders meaningful security, with a perfected security interest in 125% BTC held at a third-party collateral agent, with twice-daily margin calls, seven days a week.
2/ It is built on a full-reserve model; funds are lent on a duration-matched basis, so they are available as scheduled when customers’ loans mature.
3/ It is regulated and supervised by the Bermuda Monetary Authority under the Bermuda Digital Asset Business Act, which provides a clear regulatory framework and prudential third-party oversight.
4/ It is issued in the U.S. as an unregistered security pursuant to Reg D under the Securities Act of 1933 in accordance with U.S. law.
Circle Yield launched in limited “early access” in late 2021 and, since its official launch in February 2022 as a self-service product through the Circle Account, it has grown to approximately $248 million as of June 30, 2022. We expect to continue to innovate in this space — following customer feedback we intend to launch an open term product later this year, giving customers the flexibility to lend and withdraw their USDC at will.
During these unprecedented times in the digital asset markets Circle Yield has performed as designed. All borrower margin calls have been met on time and Circle Yield remains overcollateralized. Neither Circle nor our customers have incurred any loss. As borrowing demand has fallen along with the turmoil in digital asset markets, our rates for new loans have followed. (The fundamentals of finance remain the fundamentals of finance.)
We recognize that some of our customers have concerns with any exposure to these markets during this time of turmoil. Hence we are offering all Circle Yield customers with active loans the opportunity to withdraw their USDC from Circle Yield, early, without penalty.
Circle’s products continue to deliver for our customers, and we remain excited by the opportunities that will be unleashed in this future of on-chain programmable money.
DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.
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