US-based cryptocurrency exchange Coinbase Global, Inc. admitted that USD Coin (CRYPTO: USDC) — a stablecoin that it launched in collaboration with fintech firm Circle — is not fully backed by the United States dollar.
What Happened: Following Circle's disclosure of USD Coin's assets last month, Coinbase walked back on its previous claims about the backing of the coin, admitting that it is not fully backed by United States dollars and editing its website.
According to Bloomberg, the Coinbase website's page dedicated to USDC changed its description from "backed by one US dollar," "held in a bank account," to "backed by one dollar or asset with equivalent fair value."
Circle's report shows that about 61% of its tokens are backed by “cash and cash equivalents,” meaning cash and money market funds.
Another 13% is backed by Yankee Certificates of Deposit issued by non-U.S. banks, U.S. Treasuries account for 12%, commercial paper accounts for 9%, while the rest is backed by municipal and corporate bonds.
Why It's Important: Those assets could experience losses and are less liquid than cash, which could cause trouble if customers ever tried to redeem the stablecoin en masse.
Columbia Law School lecturer Lev Menand pointed out that "you can’t market a product with falsities" and claimed that failure to disclose this data constitutes a consumer protection violation.
He highlighted that "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 U.S. Treasuries or corporate paper.”
He has gone as far as to suggest that this could be something that the Federal Trade Commission could investigate since it is tasked with taking action against “unfair or deceptive acts or practices.”
The Centre Consortium — which manages USD Coin's reserves — publishes reserve audit reports. The March 2020 report stated that the coin’s reserves were held at federally insured U.S. depository institutions. But, in April 2020, it was changed to clarify that the reserves could also be held in “approved investments" with no further detail.
What Else: Circle intends to go public later this year in a merger with a special purpose acquisition company at a $4.5 billion valuation.
The payment company was purportedly investing in building its profits ahead of this operation and described investing its reserves as one of the “fundamentals of our financial model" during an investor presentation.
USD Coin's reserve closely resembles money-market mutual funds, but Circle does not pay a yield to investors, which is more than enough to make it worthwhile even when considering that it does not charge a management fee either.
Last week's Circle's filing with the Securities and Exchange Commission reveals that the company earned about $3.2 million in the first quarter on the interest income from USD Coin’s reserves — worth about $11 billion at the end of March.
The document also revealed that a percentage of the earnings was shared with Coinbase — as set by their contractual agreements — and that it earned about $14.1 million through its other activities.
Price Action: Despite this controversy, USD Coin's value did not unpeg from the United States dollar by press time, standing at $0.99.
Coinbase stock closed at $278 and was trading 1.19% lower, at $275 after-hours.
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