Centre's Chief Policy and Regulatory Officer, Linda Jeng, shares her thoughts on how recent events have affected the digital assets ecosystem and how to promote a more secure financial future for consumers.
As the market finds its footing following several turbulent days, we have the opportunity to reflect on lessons to be learned from the collapse of Terra and its effects on the industry. Namely:
- Not all so-called “stablecoins” are created equal.
- Algorithmic instruments are not backed 100% by U.S. dollars.
- Fiat-backed stablecoins for payments purposes should not be placed in the same category as other types of so-called “stablecoins”.
In its role as the standards organization for USDC and its growing ecosystem, Centre has been building principles, standards and technical specifications for issuers of Centre Standard Stablecoins. One of Centre’s core standards requires the maintenance of high quality, full reserves backing Centre Stablecoins. For USDC, this means bank deposits and short-dated U.S. government obligations.
We hold our issuers to this standard because in order for USDC to be recognized as a true digital representation of the dollar, and future Centre Stablecoins as true digital representations of other fiat currencies, we must build trusted, reliable and replicable standards. USDC’s reserves are entirely held in accounts at U.S.-regulated financial institutions, limited to deposits and short-dated U.S. government obligations, and are segregated from Circle’s other accounts, including its general corporate funds.
Fiat-backed currencies like USDC are fundamentally different from crypto-backed, commodity-backed, and algorithmic instruments – all of which could be securities, commodities, exchange-traded funds, derivatives, structured finance products, or even totally new categories of assets or instruments yet to be defined and named. But there is one thing that a crypto-, commodity-, or algorithmic “stablecoin'' will never be: a solid and reliable equivalent to money.
This fundamental difference became clear this week when the Terra stablecoin (UST) lost its peg and triggered reverberations throughout the industry. It has been a difficult week for many, but the failure of the Terra ecosystem highlights the unreliability of algorithmic or crypto-collateralized instruments. Without the support of a sound 1:1 reserve backing, UST, and those like it, are much more susceptible to price fluctuations or systemic instability. Furthermore, it is entirely unfeasible to imagine that something so tenuous could ever provide the foundation for a robust global payments network.
Consumers have the right to be informed and educated about the differences between these vastly different digital assets. It is essential that industry leaders as well as policymakers provide information about emerging technologies and trends to a fast-growing user base to protect our consumers, so they can continue using responsible and innovative financial products and services.
In her address to the Senate Banking Committee this week, Secretary Janet Yellen called for more “consistent” standards to support the growing stablecoin economy. We are supportive of this approach and see the standards that Centre is currently developing as additive to right-sized regulation. As we have seen, the pace of innovation in this industry is extraordinary. And while a comprehensive framework is established to provide responsible regulation, Centre’s standards will ensure that compliant stablecoins, such as USDC, will continue to allow users to exchange value in a trusted and transparent manner.
The digital assets industry has been vocal in our desire for constructive dialogue and regulation. We are hopeful that, in light of recent events, as well as promising efforts by the Biden Administration, we can now work together toward crafting the kind of smart and pro-innovation regulations that will keep the United States at the forefront of the global financial industry.
Originally published on May 13 2022, and updated July 13, 2022.