Dialogue with Circle CEO: Review, reflection and outlook after the crisis
Moderators: David, Ryan, Bankless
Guest: Jeremy Allaire, Circle CEO
Compilation: Kxp, BlockBeats
On March 11, due to factors such as the bankruptcy of Silicon Valley Bank, Circle, the issuer of the stablecoin USDC, faced a severe run. USDC continued to break down, and Circle ushered in the biggest crisis since its establishment. Subsequently, the United States joined forces to rescue the market, stabilizing investor confidence and saving USDC and Circle, which were already on the edge of the cliff. After the crisis, Bankless interviewed Circle CEO Jeremy Allaire for the first time. The latter reviewed the entire crisis and looked forward to Circle's development strategy and the future direction of regulatory policies after the crisis. BlockBeats’ translation of this interview is as follows:
Ryan Sean Adams: Today we are honored to have Jeremy Allaire, CEO and Founder of Circle. Jeremy, we know you are very busy, so thank you for taking the time to share updates with the Crypto community. How are you feeling after last week's stressful weekend? Is there any current situation that you want to share with us?
Jeremy Allaire：
It's been a very dramatic time indeed, and not just in the last week. It all started with the bankruptcy of Silvergate, and as you know, many digital asset companies, Crypto companies, and others have done business with this bank. Everyone has been discussing the issue of bank de-risking and the impact of the banking system on Crypto for some time. This topic has been attracting attention since the beginning of this year, and we are now facing some seemingly sudden systemic financial stability problems, which makes people wonder whether regulators have failed in this regard.
We have had to deal with a number of companies and challenges since the closure of Silvergate last week. Then on Wednesday, Silicon Valley Bank suddenly saw a flood of withdrawals and a need for emergency funds. From that moment on, many people panicked and questioned whether there were broader risks in American commercial banks, especially mid-sized commercial banks. Subsequently, panic began to spread, and many banks closed down as a result. So the Federal Reserve stepped in and provided $700 billion in liquidity to the commercial banking sector, ensuring that all uninsured deposits were protected from loss.
In fact, the risk mainly stems from the imbalance of asset and liability management, which is caused by rising interest rates. Banks hold long-dated bonds, straining liquidity and undermining financial stability, a phenomenon that began to attract attention on Wednesday.
I can tease out a little bit about how USDC works. When we launched USDC five years ago, we wanted to build a regulated system, approved by payments and banking regulators, connected to the banking system. The point is, we want to create and exchange a digital dollar currency linked to the banking system in a seamless way. At the time, the U.S. regulatory framework was the Stored Value Electronic Currency Act, which covered PayPal, Venmo, Cash App, Apple Pay, and every payment processor you use, all of which fall under the purview of non-bank payment systems.
It's a good system because the law requires you to keep a one-to-one payout ratio. Also, the law states that you can only hold a limited set of financial instruments. If you go beyond that, you will lose your license, bank account, etc. We also want to increase transparency because people care about the risks of Crypto. So, we started a monthly asset review by a public accounting firm to confirm the funds and the number of Tokens.
At first, only one bank, Silvergate, was able to do this. To a large extent, the birth of USDC laid the foundation for the development of Silvergate. Users who need USDC digital dollar liquidity through their platform can do so 24/7. Over the past few years, our goal has been to increase transparency and reserve quality. We believe that the base layer of the US dollar on the Internet should be government bonds, that is, the Fed's cash and short-term treasury bonds, which are essentially digital cash.
From a technical and regulatory perspective, Circle was initially unable to achieve this goal, but we have been moving towards this goal. We expanded the number of banks that can hold reserves and process USDC transactions. In the past six months we have had two major breakthroughs:
First, we converted 80% of our reserves into short-term treasury bonds and partnered with BlackRock, the world's largest asset management company, to create the Circle Reserve Fund. This reserve fund, registered and regulated by the SEC, is a government monetary fund specially set up for USDC reserves and serves the interests of USDC holders entirely. It is completely transparent, and anyone can view the Treasury portfolio, maturity date, and other details on it.
Second, the remaining 20% of reserves will be deposited in commercial banks. Circle aims to minimize commercial bank risk and ensure the best quality by working with rated, listed financial institutions. Our long-term goal is to deposit more and more funds in the world's largest cash custody institution.
We started working with the first bank in the US, BNY Mellon founded by Alexander Hamilton, they held $24 trillion in assets. In an effort to become the most robust USD cash infrastructure in the world, we began transferring cash into BNY Mellon last week. We start the transfer on Thursday and finish it on Friday. In the process, the SPB was shut down, so we still have $3.3 billion in transit.
We are disclosing this information publicly because we believe USDC holders should know. Once we publicly disclosed what we knew and the details of what we learned, we repeg'd to 98 cents. In fact, the risk that this fund will not be fully reserved and used is extremely low, and we have taken a lot of measures. We were concerned that Signature Bank might be at risk so we did the same and they closed over the weekend as well.
We needed to build multiple new settlement infrastructures in three days, and we've already done a lot of that because we're doing more and more redundancies given the banking risk issues that exist in the industry. We successfully went live on Monday, fulfilling our promise. Interestingly, after this systemic shock, we did survive. Right now we are living in a world where everyone is talking about saving the banks from crypto, and at this moment we are trying to save crypto from the banks, which is literally true.
USDC, on the other hand, is actually the safest digital dollar on the internet. We have cash on deposit with BNY Mellon and can settle through settlement banks. Moreover, we also have the Circle reserve fund supervised by the China Securities Regulatory Commission, and only the specific information of these short-term treasury bonds can be checked every day. This is definitely the best and most stable product out there. During this period, regulators and other relevant parties have given very positive feedback.
I'm in London right now, meeting with many of the major regulators. I think this is a really big test for critical infrastructure, and I'm sure this conversation will lead us into the future of this space.
David Hoffman: After learning about Circle's behind-the-scenes strategy, I have full confidence in your capabilities. It does look like a very targeted strategy against an unknown set of potential crises. If problems do arise, Circle is also flexible enough to respond to any crisis it faces. When we saw USDC drop to 88 cents, I thought to myself: "This is simply the best deal in the world." Even if Silvergate, Silicon Valley Bank and Signature Bank all went bankrupt, 88 cents still seemed incredible, and it seemed It's confirmed in the strategy you gave us. So, Jeremy, now that the banking industry in the United States has undergone a new phase of change, how is Circle adapting to these changes? What new strategies do you have?
Jeremy：
First, as the USD market infrastructure on the Internet, we want everyone to understand that cash reserves are the most secure custody infrastructure in the world. It's critical that we continue to advance the work we've done on short-term Treasuries.
Second, the crypto industry needs more banking options. Regulators and banks have reconfigured risk, so we now need to introduce new settlement banks for funds in transit. This includes sending or transferring money, and exchanging USDC. We need redundancy at this settlement layer to improve adaptability, and digital asset companies need more banking options.
Another aspect is that we want to make it easier for people to use these transfers and settlement services. USDC is the digital dollar that people all over the world want, and the digital asset market and DeFi are both highly globalized, so we want to make sure there are more high-quality deposit/withdrawal products around the world.
More importantly, it's about regulation. For many years, we have been advocating the signing of a franchise agreement with the federal government, allowing us to directly hold the Fed's cash, directly access the core payment system, and ensure that USDC becomes the safest digital currency tool in the world. It's critical that we really believe that, and the risks we feared are here to stay.
I have been a strong supporter of full reserve banking since the company was founded 10 years ago, we don't need fractional reserve banking. We could have a full-reserve banking model where the monetary base is government bonds. Innovation in payment systems takes place on the Internet in this new software-mediated way, and lending and borrowing can be done outside of it. People can complete borrowing and lending operations like in DeFi, for example, depositing USDC into a loan pool. Because there is no fractional reserve, they cannot create more USDC. If you lend money to banks, they actually create more money through fractional reserve. We hope to see a fully-reserved model, where the loan market is built with software and smart contracts, as well as DeFi primitives, while ensuring the security of the base layer as much as possible.
Ryan：
Jeremy, this whole talk gave me a deeper understanding of what Circle and USDC are doing behind the scenes. I may not have paid much attention to Circle before, because there are many things worth paying attention to in the Crypto field. The last time I followed Circle, you guys were still doing most of your banking at Silvergate, but behind the scenes, you guys were already massively upgrading your infrastructure, trying to get to a higher level, more secure level.
What intrigues me is that just last week you guys were going through the final stages of the process, like that scene in Indiana Jones where you run across a crumbling bridge and it collapses behind you. But in the end, USDC is actually stronger because of these challenges. I'm curious, how does all this work?You have started to issue USDC from a barely-known bank Silvergate five years ago, and now you have cooperated with BlackRock and BNY Mellon. How did you do it?
I would like to know,Does this mean that the ultimate vision of Circle and USDC is to be something like a proxy central bank digital currency? I know we still have a lot of steps to go, maybe I'm thinking too far, but this seems like a decent vision: Now that we have Crypto, there shouldn't be commercial bank protocol risk; it should stay in line with short-term Treasurys relationship, rather than taking the risk of the banking system or the central bank itself, right? Can we achieve this? Now that we are all aware of these problems and have seen the absence of the US central bank’s digital currency strategy, will these events trigger subsequent discussions and become a catalyst to accelerate the realization of the established goals?
Jeremy：
I think it should. Recall that everyone's discussion of CBDC actually originated from a project called Libra, which everyone thought at the time was going to be the new global stable currency. As a result, all central bank managers have stated that they want to build a global stable currency by themselves, and Facebook is not allowed to do so. Then, they began digging into stablecoins. At the same time, we are working quietly behind the scenes to use USDC to participate in DeFi and various protocols. Then in 2019, we found real product market fit. By 2020, USDC's influence has surpassed Libra. Since then, central banks have gradually recognized the private sector's model of open technological innovation and have begun to consider building their own digital currencies. Most central bank administrators now believe that stablecoins and central bank digital currencies (CBDCs) will coexist, and that they need to create a regulatory framework for stablecoins.
Now, we need a regulatory approach, and I think Congress will soon introduce a Payment Stablecoin Act. In Washington, payment stablecoins are a new term to distinguish them from synthetically derived stablecoins backed by endogenous currencies such as Luna. A payment stablecoin is like a payment token that can be used to settle payment obligations, just like cash. The Payments Stablecoin Act actually provides an opportunity for private sector players to gain recognition at the federal level and connect with the Federal Reserve.
Instead of governments building technology and innovation, we rely on public internet infrastructure, public blockchain infrastructure, and the crowdsourced open source development that powers the entire internet. We should foster self-iteration of innovation so that technology-driven, software-enabled institutions drive it all. In my opinion, we are making continuous progress towards this vision. If these events do happen, then regulators certainly don't want these stablecoins to go down when commercial banks fail. That way, you can have higher quality reserves and be better regulated.
If we're going to be the dollar market infrastructure that so many people around the world rely on, we should be heavily regulated to make sure we don't do crazy things. If we hit that goal and implement all the building things like account abstraction, layer 2, etc., you can create a user experience that works for billions of people. So I think we're two to three years away from having a model where services are served to users on the Internet and are regulated. This will be achieved faster than a central bank digital currency, and the model will most likely be Internet-scale.
Ryan：
Jeremy, I really learned a lot from this conversation. We'll be speaking with Hester Peirce from the SEC later. Entering 2023, Crypto is facing unprecedented regulatory pressure. In late 2022, headwinds abound, and I have no idea how politicians and lawmakers will respond to a banking crisis. Will they say that the banks failed Crypto, not Crypto that failed the banks; or will they point the finger at Crypto as a scapegoat? I still don't know much about this, so what I want to ask you is, what regulations do you most expect Congress or lawmakers to implement in order to accelerate the completion of the plan you mentioned earlier?
Jeremy：
I think they need a bill that was 80 or 90 percent done late last year called the MC Waters bill. Co-chairs of the House Financial Services Committee, Maxine Waters and Patrick McHenry, have worked closely on a bipartisan bill on stablecoins. The bill would create a pathway for federally incorporated companies so they don't have to deal with a patchwork of state-by-state regulations. It will also provide Circle with the most secure support and payment system permissions, making the US dollar the most competitive currency on the Internet, and giving the United States a chance to win this "space race" in the digital currency field.
I think Congress is facing an opportunity right now, especially for the House Financial Services Committee. They could have made some suggestions, and these suggestions are exactly what we need. This will also build a good foundation for many companies, so that they can enter the industry with confidence. I think the hurdle has always been the lack of clear regulations, both in the competition in the stablecoin industry, and in the process of applying this technology to other financial and commercial fields. Therefore, we urgently need to establish relevant regulations.
David：
Well, Jeremy, I know you probably had one of the most memorable weekends of your life and we are now in a bear market. Because of some of the short-term actions we've done in the 2021 and 2022 bull market, we've got a lot of work to do in the aftermath. Thank you for persevering through tough times, making changes when Circle needed to adapt quickly, and building the critical infrastructure that drives this industry forward.
Jeremy：
You're welcome. It was a pleasure to be a part of this interview and I look forward to joining again in the future. The field changes rapidly, but you've always been able to find the right people to discuss key topics.
Ryan：
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