Stablecoins: A New Financial Instrument in the Post-Banking Crisis?

Prior to now, there have been many global bank crises that have caused concern, including the USD devaluation crisis that affected many nations. During this time of currency depreciation, experts in this field have discussed the advantages of stablecoins.

This article provides a recap of the highlight session at REDeFiNE TOMORROW 2023 on "Stablecoins: Redefining Trust and Stability in a Post-Banking Crisis," which included Jeremy Allaire, CEO and Co-Founder of Circle (USDC), with Stephen Richardson, Head of APAC and SVP Financial Markets Group of Fire Blocks serving as the moderator.

Details were provided about Circle's development process leading up to the USDC launch as well as plans for developing a seamless USDC user experience in the future.

Journey of Circle over a decade

Jeremy became more interested in the financial system following the 2008–2009 financial crisis. He began learning about cryptocurrency later in 2012. In order to build an internet infrastructure with USD as a digital currency that could be used on the open internet in the same way that people use cellular data to conduct research, he founded Circle in 2013.

Additionally, over the past ten years, smart contracts have grown steadily, leading to programmable money. Individuals could write code and establish an online network economy. Jeremy believed that creating infrastructure with USD currency in circulation could actually take place. In addition, it could alter the financial system and any economic activities that take place both offline and online.

Five years later, Circle introduced USDC, also known as USD Coin, as a stablecoin that has potential for the primary financial system at the present time.

Opportunities and Challenges of Stablecoin

The first challenge Jeremy identified was technology and user experiences. Currently, stablecoin is still complicated, challenging, and risky to use, so people might not understand it.

In spite of this, these factors also presented opportunities. As a result, smart accounts were developed, which improved the efficiency and transparency of blockchain financial systems.

Plus, Jeremy noticed stablecoins as a new kind of electronic money. It is now possible to conduct transactions with fiat money, and it can be modified to comply with the laws of many different nations. It is still imperative to establish more precise regulations as soon as possible, especially for the global primary market.

Circle and how it handles the digital financial crisis

Circle has been operating in compliance with US digital financial regulations for the past five years. It consistently submitted monthly operating reports, used an audit company for bookkeeping, and followed the bare minimum of rules. People could be confident that Circle worked with the banking system and had Fiat infrastructure.

Circle made an effort to improve the infrastructure of the market where USDC operates to make it function transparently.

To upgrade USDC's infrastructure, Circle and BlackRock introduced the Circle Reserve Fund last year, which contains 80% of the USDC reserve fund. The Circle Reserve Fund was approved by the US Securities and Exchange Commission. The security, transparency, and daily verifiability of USDC, which were said to be another key aspect of building credibility for the stablecoin, would be beneficial to USDC holders, especially individuals.

Following that, this sparked a collaboration with the Bank of New York Mellon, one of the principal supervisors of reserve funds in the world, which could improve stablecoin's reliability and transparency.

Jeremy continued by saying that he believed in full reserve money, which is the idea that a stablecoin has the same reserve value as the US dollar and can be used safely on public networks.He also thought that banks and Circle were working to lessen commercial banks' dependence because he had witnessed bank failures like Credit Suisse.

Following the end of the financial crisis, Circle made a number of improvements to its infrastructure, including the following:

1) It produced cash flow of the highest quality so that it would have adequate support if there was financial risk.

2) It separated the reserve fund structure to support Treasury bills and reverse repo by having a Tripartite Pact, which would also keep organization management in place.

Jeremy said they had been trying to prevent USDC's de-dollarization because the USD declined in value and the US government was in debt.

With its best security, dependability, and transparency, USDC could be described as digital money running on the best infrastructure in the world, continuously improved by Circle.

How can the private sector help solve the problems with the USD?

As a result of the economy's issues, the war, the financial crisis, and the lack of USD reserves, many industries have attempted to develop alternative payment systems.

Jeremy noted that both the international financial system and reserve funds, which are fiat money, were in transition. However, we all had to check back to see how quick it could be changed.

In addition, he stated that the USD was important to the US's status as a strong and soft power. Furthermore, it appeared to be the foundation of the world financial system. He thought that in the future, digital currency would play a more significant part in the competition, which he saw as a good opportunity. It also depended on how the US government entered this competition.

The US government was still required to establish clear policies and provide guaranteed digital USD for private companies, banks, and financial institutions with clear regulations. However, it also needed to keep the door open to innovation and avoid interfering with the market.

Appropriate regulations for stablecoin in the view of Jeremy Allaire

Stablecoin is currently viewed as a component of the payment system and electronic money, necessitating surveillance by security regulators, banks, and financial institutions. This is the clear consensus regarding stablecoin regulation today across the world.

The current advancements in regulation are the outcome of international cooperation between numerous nations. However, stablecoin issuers continue to be held to the same standards as banks, leading to high management risk, restricted operations, and many other limitations.

Regulators still face difficulties, though, because the stablecoin on the blockchain is not on the traditional closed infrastructure under their control. This makes it challenging to introduce regulations to establish trustworthiness in online transactions. Jeremy suggested that the public and private sectors collaborate because the goal of spreading users across a large area never materializes without clear regulations.

Jeremy gave an example of how the G20 and the Financial Stability Board worked together to provide policy-based recommendations for G20 members to introduce stablecoin regulations. G20 members recently passed a bill and released regulations, which was considered another big step toward international cooperation.

Next move for Circle

Blockchain technology has undergone many innovations. Circle intends to expand the number of chains from the current ten to an additional five, enabling USDC to be used on a variety of chains.

The challenge was that using bridges (a method of moving assets between chains) still carried complexity and risk. USDC, which still had issues like high cost and risk, was the asset transferred most frequently.

As a result, Circle introduced a cross-chain transfer protocol that could burn and mint USDC as well as transfer USDC between chains without costs, risks, or blocking assets.

The Future of Circle

Jeremy promised that Circle would continue to focus on developing high standards. They aimed to establish infrastructure for digital currency payment systems and become a full reserve digital currency bank. 

Circle had the following plans:

1. Strengthen stablecoin's infrastructure as much as possible and optimize Fiat Money for the blockchain.
2. Enable USDC in the global banking system so that users can easily access and utilize USDC.
3. Continue offering infrastructure services so that Web2 developers, financial institutions, FinTech, and many others can create in order to use in various ways. As a result, the number of users may rise from 100 million to 1 billion.

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