Coinbase Drops Guarantee of USDC Stablecoin-to-Dollar Backing

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In Brief
  • Coinbase has dropped the guarantee that each USD Coin stablecoin is backed by an equivalent dollar amount.

  • Circle Internet Financial Inc., revealed that this wasn’t the case when it disclosed USD Coin’s assets for the first time last month.

  • As the stablecoins market expands to $117 billion, the coins have come under increasing scrutiny from regulators.

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Coinbase has dropped the guarantee that each USD Coin stablecoin is backed by an equivalent dollar amount.

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For months, US cryptocurrency exchange Coinbase Global Inc. offered the stablecoin USD Coin, which had a simple premise. For every dollar of the coin owned, there would be an equivalent $1 “in a bank account” to back it. 

This premise helped USD Coin grow to be the world’s second-largest stablecoin, with $28 billion in assets. However, Coinbase’s partner, Circle Internet Financial Inc., revealed that this wasn’t the case when it disclosed USD Coin’s assets for the first time last month.

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USD Coin’s backing

According to a disclosure last month, the assets in fact include commercial paper, corporate bonds and other assets. These assets could potentially experience losses at a different rate than the dollar. Additionally, they are less liquid if customers ever want to redeem the stablecoin en masse.

According to experts, this misunderstanding is not likely to go unnoticed by US regulators. Many are growing concerned over stablecoins’ potential risk to the economy. Columbia Law School lecturer Lev Menand highlighted that some could consider this disclosure failure a consumer protection violation. 

“There’s a material difference and a huge amount of evidence that something backed by dollars held in a bank account is different than something backed by things like US Treasuries or corporate paper,” Menand said. The lecturer added that the Federal Trade Commission could potentially investigate this under its mandate to enforce against “unfair or deceptive acts or practices.”

Stablecoin scrutiny

As the stablecoins market expands to $117, the coins have come under increasing scrutiny from regulators. At a recent meeting of US President Joe Biden’s Working Group on Financial Markets, policymakers focused on stablecoins in depth. 

During the hearing, participants discussed the rapid growth of the niche asset, its benefits and risks, the current framework, and the issuance of recommendations to cover any potential gaps. US regulators will publish recommendations relating to stablecoins in the coming months, according to a Treasury release.

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Nick is a data scientist who teaches economics and communication in Budapest, Hungary, where he received a BA in Political Science and Economics and an MSc in Business Analytics from CEU. He has been writing about cryptocurrency and blockchain technology since 2018, and is intrigued by its potential economic and political usage. He can best be described as an optimistic center-left skeptic.

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