Digital currency company Circle had claimed its stablecoin, USD Coin, was backed 1:1 by actual dollars in a bank account.
In July, it was revealed this was no longer the case, with Circle disclosing in an “attestation” from auditors Grant Thornton that cash made up just over 60% of USD Coin’s reserves. The other 40% was backed by various forms of debt securities and bonds.
What constitutes a stablecoin’s reserves is important. What sets them apart from other cryptocurrencies is the fact they’re pegged to an existing currency like the U.S. dollar or the euro. The aim is to avoid the volatility often found in bitcoin and other major cryptocurrencies.
Now, Circle says it’s changing the makeup of USD Coin’s reserves once again, with just cash and U.S. Treasury bonds underpinning the stablecoin.
Centre, a consortium founded by Circle and crypto exchange Coinbase which developed the stablecoin, unveiled the change on Sunday.
“Mindful of community sentiment, our commitment to trust and transparency, and an evolving regulatory landscape, Circle, with the support of Centre and Coinbase, has announced that it will now hold the USDC reserve entirely in cash and short duration US Treasuries,” Centre said in a blog post. “These changes are being implemented expeditiously and will be reflected in future attestations by Grant Thornton.”
Many crypto traders use stablecoins as an alternative to their bank, to buy or sell digital currencies.
USD Coin is the second-largest stablecoin globally, with $27 billion worth of coins in circulation.
Tether, the largest stablecoin with $75 billion in circulation, has drawn scrutiny from regulators amid fears it doesn’t have enough assets to support its peg to the greenback.
Earlier this year, tether’s issuer revealed that just 2.9% of its reserves were held in cash. The vast majority of its reserves were made up of commercial paper, a form of unsecured, short-term debt that’s riskier than government bonds.
This sparked fears that a sudden mass redemption of tether tokens could destabilize short-term credit markets.
In their latest policy meeting, officials at the U.S. Federal Reserve said stablecoins should be regulated as they pose a potential threat to financial stability.
Fed Chairman Jerome Powell has previously said a U.S. central bank digital currency could eliminate the need for cryptocurrencies and stablecoins like USDC and tether.
There are increasing calls for stablecoin issuers to provide frequent breakdowns of their reserve compositions to address opaqueness in fast-growing crypto industry.
New York Attorney General Letitia James said Tether, the company behind the stablecoin of the same name, should submit quarterly transparency reports. It’s one of the things Tether was required to do as part of an $18.5 million settlement with James’ office.
Both Tether and Circle have since released reports breaking down their reserves.
On Sunday, Centre it was “deepening its commitment to transparency” and “exploring new opportunities to collaborate with the community.”
“By later this year we expect to announce several new opportunities for members to become more formally involved with Centre’s standards and governance activities,” it added.