Dialogue with Circle CEO: Review, Reflection, and Outlook After the Crisis

Host: David, Ryan, Bankless

Guest: Jeremy Allaire, CEO of Circle

Compiled by: Kxp, BlockBeats

On March 11, due to factors such as the bankruptcy of Silicon Valley Bank, the stablecoin USDC issuer Circle faced a severe run, with USDC experiencing a persistent depegging, marking the biggest crisis since its establishment. Subsequently, various parties in the U.S. joined forces to stabilize the market, restoring investor confidence and saving USDC and Circle, which were on the brink of collapse. After the crisis, Bankless interviewed Circle CEO Jeremy Allaire, who reviewed the entire crisis and looked ahead to Circle's development strategy and the future direction of regulatory policies. BlockBeats has translated and summarized this interview as follows:

Ryan Sean Adams: Today we are honored to have Jeremy Allaire, the CEO and founder of Circle, with us. Jeremy, we know you are very busy, so thank you for taking the time to share the latest updates with the Crypto community. After the tense weekend last week, how are you feeling? Is there anything you would like to share with us?

Jeremy Allaire: This period has indeed been very dramatic, and it’s not just limited to last week. It all started with the bankruptcy of Silvergate. As you know, many digital asset companies, Crypto companies, and others had business dealings with this bank. The issue of de-risking banks and the banking system's impact on Crypto has been discussed for some time. This topic has gained attention since the beginning of this year, and we are now facing what seem to be sudden systemic financial stability issues, which raises questions about whether regulators have been negligent in this regard.

Last week, starting with Silvergate's shutdown, we had to confront numerous companies and challenges. Then on Wednesday, Silicon Valley Bank suddenly faced massive withdrawals and needed emergency funding. At that moment, many people began to panic, questioning whether there were broader risks in U.S. commercial banks, especially mid-sized commercial banks. Panic then spread, leading to the shutdown of several banks. Subsequently, the Federal Reserve intervened, providing $700 billion in liquidity to the commercial banking sector to ensure that all uninsured deposits were protected from loss.

In fact, the risk primarily stems from the imbalance in asset and liability management caused by rising interest rates. Banks held long-term bonds, which created liquidity issues and undermined financial stability, a phenomenon that began to attract attention on Wednesday.

I can give a brief overview of how USDC operates. When we launched USDC five years ago, we aimed to establish a regulated system, obtain approvals from payment and banking regulators, and connect with the banking system. The key was that we wanted to create and redeem a dollar digital currency connected to the banking system in a seamless manner. At that time, the regulatory framework in the U.S. was the Stored Value Electronic Money Law, which covers PayPal, Venmo, Cash App, Apple Pay, and every payment processor you use, all of which fall under the regulation of non-bank payment systems.

This is a good system because the law requires you to maintain a one-to-one redemption ratio. Moreover, the law stipulates that you can only hold a limited set of financial instruments. If you exceed this scope, you will lose your license, bank accounts, etc. We also wanted to increase transparency because people are concerned about the risks in Crypto. Thus, we began conducting monthly asset reviews by public accounting firms to confirm the amount of funds and tokens.

Initially, only Silvergate could perform this operation. To a large extent, the birth of USDC laid the foundation for Silvergate's growth. Users needing USDC digital dollar liquidity could operate around the clock through their platform. Over the past few years, our goal has been to increase transparency and reserve quality. We believe that the foundational layer of dollars on the internet should be government bonds, essentially cash and short-term treasury bills from the Federal Reserve.

From a technical and regulatory perspective, Circle initially could not achieve this goal, but we have been working towards it. We expanded the number of banks that can hold reserves and process USDC transactions. In the past six months, we have made two significant breakthroughs:

First, we converted 80% of our reserves into short-term treasury bills, collaborating with the world's largest asset management company, BlackRock, to create the Circle Reserve Fund. This SEC-registered and regulated reserve fund is a government money market fund established specifically for USDC reserves, serving the interests of USDC holders. It is completely transparent, and anyone can view the treasury bond portfolio, maturity dates, and other details.

Second, the remaining 20% of reserves will be held in commercial banks. Circle aims to minimize risks associated with commercial banks by partnering with rated, listed financial institutions to ensure the best quality. Our long-term goal is to deposit an increasing amount of funds into the world's largest cash custodians.

We began collaborating with the first bank in the U.S., BNY Mellon, founded by Alexander Hamilton, which holds $24 trillion in assets. To become the most robust dollar cash infrastructure globally, we started transferring cash to BNY Mellon last week. We began the transfers on Thursday and completed them on Friday. During this process, SPB was shut down, so we still have $3.3 billion in transit.

We disclosed this information publicly because we believe USDC holders should be informed. Once we publicly disclosed what we knew and the details we understood, we repegged to 98 cents. In fact, the risk of this funding not being fully reserved and utilized is extremely low, and we have taken many measures. We were concerned that Signature Bank might face risks, so we took similar measures, and they also shut down over the weekend.

We needed to establish multiple new settlement infrastructures within three days, and we have completed many tasks because, considering the banking risk issues in the industry, we are doing more redundancy work. We successfully went live on Monday and fulfilled our commitments. Interestingly, after experiencing this systemic shock, we did survive. Now we live in a world where everyone is talking about how to save banks from the impact of Crypto, while we are working hard to save Crypto from the impact of banks, which is literally true.

On the other hand, USDC is actually the safest digital dollar on the internet. We hold cash at BNY Mellon and can settle through settlement banks. Moreover, we have the Circle Reserve Fund, which is overseen by the SEC, and only specific information about these short-term treasury bills can be viewed daily. This is undoubtedly the best and most stable product available right now. During this period, regulators and other stakeholders have provided very positive feedback.

I am currently in London, meeting with many major regulatory agencies. I believe this is a significant test for critical infrastructure, and I trust this conversation will guide us in exploring the future of this field.

David Hoffman: After understanding Circle's behind-the-scenes strategies, I am filled with confidence in your capabilities. This indeed seems like a very targeted strategy to address a range of unknown potential crises. If problems do arise one day, Circle also has enough flexibility to respond to any crisis faced. When we saw USDC drop to 88 cents, I thought, "This is the best deal in the world." Even with the bankruptcies of Silvergate, Silicon Valley Bank, and Signature Bank, 88 cents still seemed incredible, and this seems to be corroborated by the strategy you provided us. So, Jeremy, now that the banking sector in the U.S. has undergone a new phase of change, how is Circle adapting to these changes? What new strategies do you have?

Jeremy: First, as the dollar market infrastructure on the internet, we want everyone to understand that cash reserves are the safest custodial infrastructure in the world. We will continue to advance the work we are doing with short-term treasury bills, which is crucial.

Second, the Crypto industry needs more banking options. Regulators and banks have reconfigured risks, so we now need to introduce new settlement banks for in-transit funds. This includes remittances or transfers, as well as converting USDC. We need redundancy at this settlement layer to enhance adaptability, and digital asset companies also need more banking options.

Another aspect is that we want to make it easier for people to use these transfer and settlement services. USDC is the digital dollar that people around the world want, and the digital asset market and DeFi are highly globalized, so we want to ensure that there are more high-quality deposit/withdrawal products available worldwide.

More importantly, this relates to regulation. For years, we have advocated for a charter agreement with the federal government that would allow us to hold cash directly from the Federal Reserve and have direct access to the core payment system, ensuring that USDC becomes the safest digital cash tool in the world. We truly believe this is crucial, and the risks we are concerned about have now materialized.

Since the company's founding ten years ago, I have been a staunch supporter of a full-reserve banking system; we do not need a fractional reserve banking system. We can have a full-reserve banking model where the monetary base layer consists of government bonds. Payment system innovations occur through this new software-mediated approach on the internet, while lending can be done outside of it. People can perform lending operations as they do in DeFi, for example, by depositing USDC into a lending pool. Because there is no fractional reserve, they cannot create more USDC. If you lend money to a bank, they actually create more money through the fractional reserve system. We want to see a full-reserve model where the lending market is built with software, smart contracts, and DeFi primitives, while ensuring the safety of the base layer as much as possible.

Ryan: Jeremy, the entire conversation has given me a deeper understanding of everything Circle and USDC are doing behind the scenes. I may not have paid much attention to Circle before because there are so many things to focus on in the Crypto space. The last time I paid attention to Circle, you were still handling most of your banking with Silvergate, but behind the scenes, you have been upgrading your infrastructure on a large scale, striving for a higher and safer level.

What interests me is that just last week, you were completing the final stages of this process, like a scene from "Indiana Jones," where you run across a rickety bridge that collapses behind you. But in the end, USDC actually became stronger because of these challenges. I am very curious about how all of this was achieved. You started issuing USDC five years ago with a little-known bank, Silvergate, and now you have partnered with BlackRock and BNY Mellon. How did you accomplish this?

I wonder, does this mean that Circle and USDC's ultimate vision is to become something akin to a proxy central bank digital currency? I know we have many steps to take, and perhaps I am thinking too far ahead, but it seems like a good vision: since we already have Crypto, there shouldn't be risks associated with commercial bank agreements; it should correspond with short-term treasury bills rather than bearing the risks of the banking system or the central bank itself, right? Can we achieve this? Since we are all aware of these issues and have seen the lack of strategy from the U.S. central bank regarding digital currency, will these events spark subsequent discussions and act as a catalyst for accelerating the realization of established goals?

Jeremy: I think it should. Looking back, the discussion around CBDCs actually originated from a project called Libra, when everyone thought it would become the new global stablecoin. So, all central bank managers said they would build their own global stablecoins and would not allow Facebook to do so. Then they began to study stablecoins in depth. Meanwhile, we have been quietly working behind the scenes, participating in DeFi and various protocols with USDC. By 2019, we found a true product-market fit. By 2020, the influence of USDC had surpassed that of Libra. Since then, central banks have gradually recognized the open technological innovation model of the private sector and have begun to consider establishing their own digital currencies. Now, most central bank managers believe that stablecoins and central bank digital currencies (CBDCs) will coexist, and they need to establish a regulatory framework for stablecoins.

Now, we need a regulatory approach, and I believe Congress will soon introduce a "Payment Stablecoin Act." In Washington, the term payment stablecoin is a new term to distinguish it from synthetic derivative stablecoins backed by endogenous currencies like Luna. A payment stablecoin is like a payment token that can be used to settle payment obligations, just like cash. The Payment Stablecoin Act will actually provide private sector participants with the opportunity to gain recognition at the federal level and connect with the Federal Reserve.

We are not relying on the government to build technology and innovation; rather, we rely on public internet infrastructure, public blockchain infrastructure, and crowd-sourced open-source development technologies that drive the entire internet's development. We should promote the self-iteration of innovation, allowing technology-driven, software-supported institutions to drive all of this development. In my view, we are continuously moving towards this vision. If these events do occur, regulators certainly do not want stablecoins to collapse along with commercial banks. This way, you can have higher quality reserves and better regulation.

If we are to become the dollar market infrastructure that many people around the world rely on, we should be subject to strict regulation to ensure we do not engage in reckless behavior. If we achieve this goal and realize all the ongoing initiatives like account abstraction, layer 2, etc., you can create a user experience applicable to billions of people. Therefore, I believe we are two to three years away from building a model that can serve users on the internet and be regulated. This will happen faster than central bank digital currencies, and this model is likely to scale to the internet.

Ryan: Jeremy, I have really gained a lot from this conversation. We will later engage with Hester Peirce from the SEC. As we enter 2023, the regulatory pressure facing Crypto is unprecedented. At the end of 2022, there were many obstacles, and I am still unclear how politicians and legislators will respond to the banking crisis. Will they say that banks have let down Crypto, rather than Crypto letting down banks; or will they point fingers at Crypto, viewing it as a scapegoat? I am still not sure about this, so what I want to ask you is, to accelerate the completion of the plans you mentioned earlier, what regulations are you most looking forward to Congress or legislators implementing?

Jeremy: I think they need a bill that was 80% or 90% completed at the end of last year, known as the MC Waters bill. The co-chairs of the House Financial Services Committee, Maxine Waters and Patrick McHenry, have been closely collaborating on a bipartisan bill regarding stablecoins. This bill will create a pathway for federally registered companies so that they do not have to deal with a patchwork of state regulations. It will also provide Circle with the safest support and payment system permissions, allowing the dollar to become the most competitive currency on the internet and giving the U.S. the opportunity to win the "space race" in the digital currency field.

I believe Congress is now facing an opportunity, especially for the House Financial Services Committee. They can propose some recommendations that are exactly what we need. This will also lay the foundation for many companies to enter this industry with confidence. I think the ongoing barrier has been the lack of clarity in regulations, whether in the competition within the stablecoin industry or in applying this technology to other financial and commercial fields. Therefore, we urgently need to establish relevant regulations.

David: Well, Jeremy, I know you may have just gone through one of the most memorable weekends of your life, and we are now entering a bear market. Due to some short-term actions we took during the bull markets of 2021 and 2022, we have a lot of cleanup work to do. Thank you for persevering during difficult times and for making changes when Circle needed to adapt quickly, while also building critical infrastructure to drive the development of this industry.

Jeremy: You’re welcome. I’m glad to participate in this interview, and I look forward to joining again in the future. This field is changing rapidly, but you always manage to find the right people to discuss key topics.

Ryan: Well, Bankless Nation, that’s it for today. As always, we will conclude this interview with our usual risks and disclaimers. No investment advice is provided here; Crypto is risky, but when you think about it, banks are too. The funds you invest could be lost, but we are moving in the right direction. We are excited to embark on the Bankless journey with you, and thank you all for watching.