USDC Transparency Article: "Security" is Relative, Not Absolute, Risks Definitely Exist

Since the collapse of Terra UST, USDT has slightly decoupled and faced redemption doubts. USDC, which has always been touted as compliant, has also been rumored to have risks within the community. In response, the issuer Circle has published many educational articles on asset transparency since May, including:

• 5/13: How to Maintain Stability - USDC Transparency and Trust
• 5/26: Why Developers Can Trust USDC?
• 6/3: How to Build Trust - USDC Audits and Attestations
• 6/13: USDC Transparency and Trust - The Importance of Liquidity

On 7/5, Chief Financial Officer Jeremy Fox-Geen published the fourth article in the series on transparency and trust, titled "How to Minimize Risk." Here is a summary.

"Security" is Relative, Not Absolute, and Involves Risks

Jeremy stated that Circle aims to enable billions of people to use digital assets to exchange trillions of dollars' worth of value every day, but this can only be achieved under the condition of stable underlying assets.

Therefore, Circle's economic incentive is to minimize risks by promoting the adoption of USDC, while they are committed to ensuring that USDC can always be redeemed for dollars on a 1:1 basis. Jeremy said:

"Your money is safe," "Our risk control capabilities are world-class," these are phrases spoken by every financial institution and CEO worldwide, until the moment when your money is no longer safe, and users are unable to withdraw funds.

Jeremy believes that all financial institutions inherently carry risks, which is why consumer protection regulations exist. "Security" is a relative term, not an absolute one, as risks will always exist.

Hence, Circle's business model focuses on minimizing risks as much as possible, rather than "assuming, managing risks."

Providing Stable Coins on the Internet

Circle believes that just as the Internet exchanges trillions of bytes of data every day, currencies will also be realized on the Internet, benefiting everyone:

• Further unlocking value, such as eliminating T+2 settlement times.
• Reducing economic rents, such as 6% cross-border remittance fees and 3% credit card processing fees.
• Financial innovation: The long-tail effect in the capital market on the chain.

Circle aspires to be a part of the underlying infrastructure in the new financial ecosystem. This will benefit Circle, but it can only be achieved under the condition of stable underlying assets, hence their economic incentive is to minimize risks.

USDC Reserve Subject to Legal Regulations

When Circle introduced USDC, Jeremy stated that they had to "convince" regulatory authorities to regulate them. Today, USDC is subject to:

• Regulation by state money transmission laws for Circle.
• Being classified as an electronic stored value tool for USDC.
• The reserve is held as assets of USDC holders and stored in a designated independent account.

Jeremy emphasized:

Unlike banks, the reserve is separate from Circle's other businesses and cannot be used for lending or other purposes. In extreme scenarios such as bankruptcy, the independent USDC reserve will remain redeemable and be protected under state money transfer laws, separate from bankruptcy assets.

Reserve Risks

80% Short-Term U.S. Treasury Bonds

Approximately 80% of the reserve is composed of short-term U.S. Treasury bonds maturing within three months, known for their strong liquidity, price stability, and same-day redemption settlement, held in custody by the Bank of New York Mellon.

20% Cash

Circle holds about 20% of the reserve in USD within the traditional banking system, with partners including Silvergate, Signature Bank, and New York Community Bank (NYCB).

Jeremy explained that while most people consider cash USD the safest, holding a large amount of cash also exposes traditional banking systems to counterparty and credit risks. Therefore, in addition to continuing to diversify banking partners, they will also explore other methods, with the long-term goal of holding USD reserves directly in reserve banks.

He emphasized that even in situations where the banking system is temporarily suspended, such as holidays, USDC provides nearly 24/7/365 real-time minting, redemption, and settlement services, allowing users to redeem $14.7 billion in June.

Overall, USDC, with its market value and on-chain market share, is gradually challenging USDT, which has been plagued by various rumors. By emphasizing compliance as the foundation, USDC's momentum is strong. CoinMarketCap data shows that following Terra's collapse, the market values of the two stablecoins are diverging, with USDT declining while USDC is on the rise. If USDT fails to reverse its decline, USDC may soon experience a golden cross moment.