Caught red-handed! Coinbase retaliates against PAX claiming "unmanageable," quietly changes USDC reserve description

The controversy over stablecoin compliance is far from over. Following Paxos' legal advisor's criticism that USDT and USDC are fundamentally incompatible with the word "stable," issuer Circle announced that it has become a fully-reserved bank, subject to federal government regulation. Coinbase also issued a lengthy statement in support of USDC, but was caught quietly altering the description of USDC reserves on its website.

Looking back at Coinbase's announcement of its partnership with Circle in 2018, we can even see the statement "Each USDC is backed by a corresponding 100% reserve of US dollars in a bank account."

Controversies Regarding USDT and USDC

Earlier, Dan Burstein, legal counsel for the issuer of the stablecoin Paxos Standard, revealed the cash reserves of Paxos Standard and compared them with the reserve ratios of USDT and USDC, exposing the deficiencies in the reserve ratios of the latter two. PAX has the highest percentage of cash and cash equivalents at 96%.

He mentioned the shortcomings in the reserve systems of both, as well as the risks that unclear regulations may pose to users:

• The majority of the reserves for both are supported by CDO corporate loans and bonds
• There is no commitment or guarantee that users can redeem for US dollars
• CDOs also carry the risk of corporate default
• There is a liquidity risk as CDOs often last for several years
• The issuer can frequently use the reserves to pursue high-risk investments

Coinbase Fact-Checks

In response to Dan Burstein's "false accusations," Coinbase refuted each point.

1. Neither USDC nor Tether are actually regulated by any regulatory body.

Coinbase responded:

USDC is a stored value tool, similar to a prepaid card, and the product is regulated under state money transmission laws, therefore USDC issuer Circle is supervised by regulatory bodies in 46 states, which also conduct regular examinations of Circle's activities.

2. Besides the name, USDC and Tether have nothing to do with being "stable."

The reserve assets of USDC are determined by state regulatory bodies and invested according to the investment list provided by those bodies, similar to the regulations followed by Coinbase and PayPal.

3. The issuer can frequently use the reserves to pursue high-risk investments.

No, this would not be the case with USDC, as the investment list provided by regulatory bodies clarifies this risk. USDC reserves do not include high-risk, high-yield investments.

4. Circle lists the reserves in their balance sheet, does this mean "Circle considers USDC reserves as their own assets?"

Many "stored value product" issuers report reserve assets on their balance sheets, which is a common and acceptable accounting practice and should not be misconstrued as "Circle considers USDC reserves as their own assets." The corresponding liabilities in the report are "USDC holder deposits," clearly indicating that the funds belong to USDC holders.

Coinbase Website Updates on Reserves Description

This indicates that USDC is no longer the stablecoin backed entirely by 100% US dollars, but rather has a reserve structure similar to USDT. The new reserve description can be found here:

Each USDC is backed by 1 US dollar, "or assets of equivalent fair value," with the assets stored in accounts at US-regulated financial institutions.

Looking back at Coinbase's announcement in 2018 when they launched USDC in partnership with Circle, it stated:

Each USDC is backed by a corresponding 100% US dollar held in accounts and regularly publishes reserve reports. USDC is developed by Coinbase and Circle, both as founding partners and co-founders of CENTER.

Coinbase spokesperson Andrew Schmitt emphasized to Bloomberg that:

Users can always exchange 1 USDC for 1 US dollar, and we have added more detailed information on our website for users to understand more about USDC reserve funds.