(Bloomberg) —
A consortium including Coinbase Global Inc. said all the reserves of the second-largest cryptocurrency stable coin will shift into cash and short-term U.S. Treasuries, forgoing riskier investments.
The reallocation of the assets backing USDC, a $27 billion stablecoin, marks a swift change from July when consortium member Circle Internet Financial Inc. said that the reserves included corporate bonds and commercial paper.
Until August, Coinbase’s website falsely described USD Coin as backed completely by dollars “in a bank account.” The company changed the description after being contacted by Bloomberg News earlier this month.
In a series of tweets, Coinbase President Emilie Choi said that the company’s description of USDC’s reserves “could have been clearer,” and that it “should have moved faster to update statements like that on our website” after Circle disclosed the reserves included assets other than cash. The money had first moved into a diversified portfolio in May 2021, Choi said.
Choi said USD Coin’s reserves will be comprised entirely of cash and short-term Treasuries starting in September.
According to Circle, USD Coin’s reserves have not been all-cash for more than a year. The reserves were only in cash until March 2020, when the company added short-term U.S. Treasuries to accommodate the coin’s rapid growth, according to a Circle spokesperson, who said the coin’s disclosures also changed to reflect that. The coin’s reserves moved to a broader portfolio of investments in May 2021, the spokesperson said. By the end of September, the spokesperson said the reserves will be completely in cash and Treasuries with a term of less than 90 days.
Circle and Coinbase have said that users can always exchange one dollar of USD Coin for an actual dollar that can be deposited in a bank account.
Centre, the consortium that includes Coinbase and Circle, revealed in July that 61% of the reserves were in risk-free assets like cash and its equivalents, but that some of the reserves were in assets that contain some risk of default, such as corporate debt and certificates of deposit with foreign banks. An additional 12% of the funds were in Treasury bonds, which aren’t considered a default risk but also aren’t as liquid as cash.
Aaron Brown, a crypto investor who writes for Bloomberg Opinion, says it gives the consortium less ability to diversify, which could be important down the line.
“The old investment rules for USD Coin were perfectly sound,” said Brown. “Circle is making a splashy announcement to address a problem that doesn’t exist, in hopes of making itself seem more prudent than rivals.”
Tether, the largest stablecoin and one widely used to trade Bitcoin, has also in the past said each token is backed by one U.S. dollar, either through actual money or holdings that include commercial paper, corporate bonds and precious metals. That has triggered concerns that if lots of traders sold stable coins all at once, there could be a run on assets backstopping the tokens.
That’s caught the eye of regulators in Washington, who have grown wary of the rapidly growing world of stablecoins — whose market capitalization currently stands above $119 billion — and some of the hidden risks that might be present.
Bloomberg News reported this summer that lawmakers and officials from the Federal Reserve as well as the Biden administration have expressed alarm that some consumers might not be protected should one of the firms not have the backing they purport to have. They also say the growing size of the market has created a situation where huge amounts of U.S. dollar-equivalent coins are being exchanged without touching the U.S. banking system, something that is potentially blinding regulators to illicit finance.
Among stablecoins, USD Coin’s market value trails only Tether’s $64 billion. Circle said last month it was set to go public in a merger with special purpose acquisition company — the deal valued the company at $4.5 billion.
(Updates with tweet from Coinbase president in fourth paragraph and timeline of USDC’s reserves in sixth paragraph)
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