USDC stablecoin: problems and prospects
USDC has become one of the leading stablecoins, but its current position is not as encouraging as it was in early 2023. At the same time, competition between stablecoins continues to grow, and negative events such as the loss of parity to the U.S. dollar can seriously shake confidence even in an asset with a large capitalization.
About USDC stablecoin
The USD Coin cryptocurrency was launched in September 2018 by the Circle-founded consortium Centre, which consists of U.S. cryptocurrency exchange Coinbase and well-known ASIC miner Bitmain. USDC is a stablecoin whose price is pegged to the fiat currency USD.
From a technical point of view, USD Coin is practically no different from the leading Tether (USDT) stablecoin. The main feature of USDC lies in its centralisation: token issuance is fully controlled by a private company.
USDC is considerably inferior in capitalization to the leading stablecoin USDT: $24.3bn vs $90.5bn. However, USD Coin is still the second stablecoin by this indicator and seventh in CoinMarketCap's list of all cryptocurrencies, surpassing:
Current USD Coin issues
USDC is a centralized and fiat-backed stablecoin fully controlled by the issuer Circle. This problem will likely persist for the duration of the USDC stablecoin's existence.
Like any other tokens, USDC tokens are managed through a smart contract in which developers can lay down any features they want, such as address freezing and asset stripping, as in the case of USD Coin.
The second problem with USD Coin remains the lack of transparency of Circle's reserves: if they are insufficient in a critical situation, investors will find themselves in a vulnerable position. In the event of a loss of parity to the dollar, investors will be forced to request collateral dollars from Circle, and they will suffer losses if, for some reason, the reserves run out.
Users were alerted that Circle changed the wording on its website in 2021 regarding Stablecoin collateral. Before that, the USD Coin was "backed by U.S. dollars," but after that, it became "fully backed by reserved assets." U.S. firm Grant Thornton LLC confirms USD Coin's reserves, but it does not audit them at the same time.
Data on reserves are published on Circle's website: according to them, the amount reserved is $24.4 billion, corresponding to the stablecoin's capitalization. Deloitte also releases a monthly report confirming USDC reserves, which are also published on Circle's website.
The history of UDC's formation
USDC was issued, like most well-known stablecoins, as an ERC-20 token on the Ethereum blockchain. However, the USDC stablecoin is now available on over 50 blockchains, almost as many as the leading USDT.
In March 2021, payment giant Visa partnered with Circle, allowing transactions with USDC tokens through its payment system. Later, in 2023, Visa announced that it would conduct international transactions using USDC tokenisation on the Solana blockchain. The company said the move would help improve the speed and reduce the cost of international financial transactions.
On March 11, 2023, USD Coin lost parity to the U.S. dollar amid the bankruptcy of Silicon Valley Bank (SVB): in just one day, USDC's capitalisation collapsed by 13%, and its exchange rate fell to $0.92 at one point, which is critical for stablecoins, especially after the collapse of other similar assets such as UST and USDN. The reason was Circle's announcement that SVB Bank held $3.3bn in reserves, which at the time represented about 8% of its total reserves. At the time, investor tensions were so high that the collapse of even a major stablecoin could trigger a new, stronger wave of collapse.
Fortunately, a day later, USDC regained parity against the U.S. dollar after stablecoin issuer Circle burned 3.3 billion tokens.
Shortly before the loss of the USDC's peg to the USD, the capitalization of the stablecoin started to decline and continues to do so until now. In just 9 months, this indicator fell by almost 45% from $43.5 to 24.3 billion. Investors might have feared a repeat of the situation, so most of the liquidity flowed into USDT stablecoin, the capitalisation of which, on the contrary, began to grow more rapidly and reached an absolute maximum as a result.
A little later in August, the Centre consortium was abolished, and cryptocurrency exchange Coinbase acquired a minority stake from Circle. As a result of the deal, the percentage of revenue between the two companies has levelled out.
Circle continues to expand and has partnerships with new banking organizations such as Japanese financial conglomerate SBI Holdings and Brazilian bank Nubank.
Future of USDC stablecoin
It is likely that USD Coin will continue to be actively used alongside Tether and PayPal's recently released PYUSD but may lose ground. Like USDT, the capitalization of the PayPal USD token continues to grow strongly while that of USDC is falling.
Still, if PYUSD displaces USD Coin, it will not be in the near future, as its capitalisation is only $159 million, which is 152 times less than the exact figure of USDC.
