The Battle of Stablecoins: Circle's Rise and the Competition from New Forces in Traditional Finance

Source: Silicon Valley 101

Compiled & Edited by: Daisy, ChainCatcher

Editor's Note:

This article is compiled from the audio interview between podcast host Hongjun and Liu Feng with Can Sun and Zheng Di. Hongjun is the host of "Silicon Valley 101," Liu Feng is the host of "Web3 101," a partner at BODL Ventures, and former editor-in-chief of Chain News. Guest Can Sun is the co-founder and legal compliance officer of Backpack Exchange, who has been deeply involved in the legal framework design of USDC; Zheng Di is a frontier investor focusing on finance and crypto technology.

The interview uses Circle's listing as a starting point to delve into the differences between USDC and Tether (USDT) in terms of compliance paths, profit models, and alliance structures, extending to future regulatory trends for stablecoins, changes in platform dynamics, and strategic possibilities in conjunction with AI and global settlement networks.

The following is a compilation and translation of the interview content.

TL;DR:

• Circle becomes the first publicly listed stablecoin issuer, with USDC seen as the representative of the "digital dollar," leading to a surge in market capitalization and attention.
• The stablecoin market is entering a heated phase, with compliant USDC and non-compliant USDT competing, while traditional finance and tech giants accelerate their entry.
• Coinbase is deeply tied to USDC, which, while promoting its rapid expansion, limits long-term profits due to revenue-sharing agreements.
• Tether leads the market with a high-yield, high-risk model, while Circle adheres to a compliant and transparent route, resulting in a significant profitability gap.
• Regulatory proposals like the "Genius Act" are expected to reshape industry order, pushing stablecoins toward legalization and institutionalization.
• Circle is building an on-chain global settlement network, integrating AI payment scenarios, aiming to become a new infrastructure for digital finance.

Comparison of USDC and Tether's Systems and Profit Models

Hongjun: The first question is, why has Circle's listing received such a warm reception? Can, what do you think?

Can Sun: The core value of USDC lies in its role as a settlement and payment tool for the digital dollar. The traditional financial payment system has seen almost no substantial changes for decades; bank transfers are limited by working hours, and overall efficiency remains stuck in the last century. Circle's digitization of the dollar enables real-time settlement globally 24/7, which represents a fundamental upgrade for the entire financial system.

Another highlight of Circle's listing is that the underwriting institutions include traditional financial giants like JP Morgan and Goldman Sachs, which are also exploring the issuance of stablecoins. If they integrate USDC into their existing clearing systems in the future, USDC could potentially become the "official" digital dollar. Therefore, Circle's listing not only signifies the success of a tech company but also reflects traditional finance's positive attitude toward the prospects of the digital dollar.

Zheng Di: Circle's deep binding with Coinbase limits its profitability. From a fundamental perspective, the $7 billion IPO valuation is reasonable, but the rapid increase to a market cap of $25 billion reflects more of the market's scarcity expectations for compliant stablecoin targets.

The stablecoin market itself has enormous growth potential. Two data points are worth noting: first, the U.S. government and institutions like Standard Chartered predict that by 2028, the global stablecoin market size will grow from the current $250 billion to $2 trillion; second, more aggressive views, like those of Michael Saylor, suggest that the market size could reach $10 trillion in the long term. Under such growth expectations, investors are willing to assign higher valuations.

Hongjun: Is the $2 trillion referring to the total size of the entire stablecoin market?

Zheng Di: Currently, Circle holds about 24% to 25% of the stablecoin market share. If its market share remains unchanged and the overall market expands eightfold, Circle's corresponding asset size could grow to $480 billion or more.

Hongjun: To add some background information, the issuer of USDT, Tether, is an offshore entity and is not subject to U.S. regulation; while USDC is issued by Circle, which is registered in the U.S. and subject to state regulation, making it a compliant stablecoin. As of now, the global stablecoin market capitalization is about $250 billion, with USDT accounting for about $150 billion, or 62.5%; USDC accounts for about $61 billion, or around 24%.

So, what specific aspects reflect USDC's "compliance"? It is understood that Circle disclosed a large amount of operational costs and compliance information in its IPO prospectus. In contrast, Tether is seen as one of the most profitable crypto companies currently.

Can Sun: Currently, there is no unified federal-level stablecoin regulatory law in the U.S., lacking a complete framework similar to the EU's MiCA. USDC's "compliance" mainly manifests in its operation under the supervision of various states, especially the New York State Department of Financial Services (NYDFS), and it must comply with regulations regarding reserve management and audit disclosures.

USDC publishes its reserve structure monthly, with all funds allocated to government money market funds and short-term U.S. Treasury bonds, held in custody by large banks or independent trust companies, and subject to audits. In contrast, while Tether has also begun to disclose its reserves in recent years, the types of assets are more complex, and the transparency is relatively low.

Liu Feng: Regarding the "Genius Act," could you introduce the most impactful provisions for the industry? What effects might this legislation have on Tether and the entire stablecoin industry?

Can Sun: This bill has not yet been formally passed and is still under negotiation in the U.S. Congress. Once enacted, it will become the first federal-level stablecoin regulatory framework, bringing significant benefits to the industry, as clear regulations will allow traditional financial institutions like banks and funds to participate legally.

The most critical provision states that any stablecoin wishing to circulate in the U.S. or serve U.S. users must obtain regulatory approval from the U.S. or accept equivalent regulation recognized by the U.S. Otherwise, the government can prohibit it from being listed on U.S. exchanges and has the authority to freeze its dollar reserves.

This provision has particularly significant implications for Tether. Most dollar settlements globally rely on the U.S.-led clearing system; even if Tether holds dollar accounts offshore, as long as its clearing bank is located in the U.S., the U.S. government has the ability to cut off its dollar flow.

Liu Feng: In other words, the U.S. can directly "choke" it through the dollar system?

Can Sun: Yes. If Tether fails to meet U.S. regulatory requirements, the government can require banks to stop holding its dollar reserves. Once the reserves are frozen, USDT will lose its ability to maintain a 1:1 peg with the dollar, which would be a fatal blow for a stablecoin. The U.S. has historically used the financial system as a tool for sanctions, and countries like Iran and North Korea have been restricted because of this.

Liu Feng: Do you think Tether has the ability to meet the relevant regulatory requirements? Is it possible for it to operate legally and compliantly in the U.S.?

Can Sun: The Tether team has the capability and is indeed pushing for compliance and transparency. However, whether it can meet U.S. regulatory requirements in the short term remains uncertain. Especially under higher regulatory standards, its reserve structure and corporate governance may require more time for adjustments.

Liu Feng: This means future competition will be fairer. In the past, Tether benefited from regulatory arbitrage, while USDC bore higher compliance costs. As rules become more unified, Tether will have to catch up.

Can Sun: Yes, the crypto industry generally has a "no regulation first, compliance later" approach, with many projects initially operating offshore and seeking compliance after growing. However, once the U.S. implements strict regulations, institutions like Tether will be required to meet regulatory standards from the outset and will no longer be able to rely on regulatory gaps for survival.

Hongjun: We just analyzed the reasons for USDC's attention; next, let's review Circle's development path. The company was founded in 2013, and USDC was launched in 2018. Can, were you involved in the legal documentation for the joint launch of USDC with Coinbase at that time? Additionally, why did Circle choose to enter the stablecoin space initially? How did the collaboration with Coinbase come about?

Can Sun: In 2018, the stablecoin market was almost monopolized by USDT, and the transfer and replenishment of assets between exchanges heavily relied on USDT. However, due to its offshore operations and lack of transparency, there were significant risks. Circle was exploring diversification at that time, having businesses like Poloniex exchange, OTC trading, and payment tools, but none had formed a core breakthrough.

They realized that the market lacked a compliant stablecoin and thus partnered with Coinbase to establish a joint venture called Center to jointly launch USDC. Both companies hold 50% equity and are jointly responsible for the issuance and governance of USDC, aiming to build a transparent, compliant, and auditable stablecoin system.

Liu Feng: Circle's early business was quite diversified, involving Bitcoin wallets, payment products, OTC trading, and operating the Poloniex exchange. Subsequently, the company gradually divested these businesses and ultimately focused on USDC. Can this be seen as a form of "strategic all-in"? How did you view this transition at that time?

Can Sun: Yes, after 2019, Circle gradually divested businesses like Bitcoin wallets, OTC trading, and Poloniex, turning its focus to USDC. At that time, there were doubts about this "giving up everything" strategy, as Poloniex still had scale, and the OTC business had stable institutional clients.

However, Circle anticipated that compliant stablecoins had the potential to become an important part of future financial infrastructure. Whoever could enter the market first and establish ecological barriers could potentially become the core bearer of the "digital dollar." The transparency and compliance of USDC earned it recognition from large institutions, payment companies, and even governments.

The company judged that this was a "winner-takes-all" track, and the strategic value of the stablecoin ecosystem far outweighed the short-term profits of other marginal businesses.

Hongjun: According to Circle's prospectus, although Coinbase has exited as a shareholder of Center, it still retains 50% of the interest income from USDC. What is the background behind this revenue-sharing agreement? What are your thoughts on it?

Can Sun: This revenue-sharing agreement was established during the early days of USDC. Coinbase provided critical resources for USDC, including user channels, wallet systems, and exchange listing support. In return, Circle signed a revenue-sharing agreement with them for interest income.

The agreement stipulates that as long as Coinbase meets specific growth KPIs each year, it can renew the agreement and continue to receive 50% of the interest income from USDC long-term. So far, Coinbase has indeed met these targets.

This also means that although Circle bears the issuance, operation, and legal responsibilities, it can only retain half of the revenue, with the other half needing to be shared with Coinbase, limiting its profitability.

Zheng Di: Coinbase essentially plays a "laying down to earn" role. It does not bear the legal and regulatory responsibilities of USDC issuance but, due to the early binding, has obtained a long-term profit-sharing mechanism, almost becoming a "perpetual dividend platform." Although Circle's overall profits seem considerable, they shrink significantly after the revenue-sharing.

Can Sun: Yes, but from a strategic perspective, this binding relationship did help USDC quickly open up the market in the early days. As a compliant exchange, Coinbase promoted the listing of USDC, integrated wallet support, and established a solid initial ecosystem for it. While this "first share, then win" strategy was a reasonable choice at the time, it has now placed Circle in a relatively passive position regarding its revenue structure.

Liu Feng: This brings to mind another question. In recent years, Binance has gradually reduced its support for USDC and shifted to promoting a stablecoin called USD1. It is rumored that USD1 involves the Trump family and an Abu Dhabi fund. Can, how do you view this trend?

Can Sun: USD1 is issued by First Digital, headquartered in Hong Kong and registered in Abu Dhabi. Binance has a close relationship with it, mainly because the project provides the platform with greater bargaining power and revenue sharing. In contrast, USDC is deeply tied to Coinbase, so Binance not only bears usage costs but also cannot obtain profit sharing, leading to a gradual reduction in support. This phenomenon reflects a trend in the stablecoin market: major platforms are beginning to support their own or partnered stablecoins, gradually forming different alliance camps.

Zheng Di: Currently, the stablecoin market can be roughly divided into five major camps:

The first is the USDT camp led by Tether, which has the largest market share and the widest application but relatively weak compliance.

The second is the USDC camp, led by Circle, emphasizing compliance and transparency, and deeply tied to Coinbase.

The third is Binance's USD1, which has obvious platform attributes and a complex capital structure behind it.

The fourth is the tech company camp, including PYUSD issued by PayPal and USDB supported by Stripe, leveraging their own payment networks to promote stablecoin adoption.

The fifth is the traditional bank camp, such as JPM Coin from JPMorgan and internal stablecoins from Citigroup, mainly used for B2B clearing between institutions.

Liu Feng: How do you think these stablecoin camps will evolve in the future? Will it ultimately form a dual oligopoly, or will each occupy different markets?

Zheng Di: I believe the stablecoin market may ultimately form a structure similar to operating systems, dominated by two to three players. Just like Android and iOS, one is open but riskier, while the other is closed but emphasizes compliance, and both can coexist in the long term.

Tether will continue to serve non-compliant markets, DeFi, and high-risk trading areas, while compliant stablecoins like USDC will gradually enter mainstream financial systems such as payments, clearing, and banking.

Hongjun: We just mentioned the differences in profit models between USDC and USDT. Can you explain specifically how stablecoin issuers achieve profitability? For example, after a user redeems 1 USDC, how does Circle generate income?

Can Sun: The profit model of stablecoins is relatively simple. When a user redeems 1 USDC, Circle receives 1 dollar in reserves. This money is invested in highly liquid, low-risk assets like U.S. Treasury bonds and money market funds, currently yielding about 4% annually.

Since USDC holders do not earn interest, all profits belong to the issuer, creating a clear "interest spread"—stable asset returns without the need to pay interest.

Liu Feng: So if Circle currently manages about $61 billion in USDC, at an annual yield of 4%, that would mean it could earn about $2.4 billion in interest income each year?

Can Sun: Theoretically, yes, but actual earnings need to deduct various costs, such as the share paid to Coinbase, operational expenses, and audit fees. Even so, Circle remains profitable, especially during periods of rising interest rates, where interest income increases significantly.

Zheng Di: Tether's profit model is relatively more aggressive. Although its reserves also include safe assets like U.S. Treasury bonds and cash, disclosed information shows it also includes high-risk assets like Bitcoin, gold, and equity in unlisted companies, resulting in a significantly higher overall yield compared to Circle.

Market estimates suggest Tether's annual profit may exceed $6 billion, while Circle's is less than half of that. This also enables Tether to continue making large dividends, investments, and acquisitions.

Circle's Development Strategy and the Trend of Stablecoin Alliances

Hongjun: It sounds like Tether operates more like a hedge fund rather than a provider of financial infrastructure?

Can Sun: Indeed. Tether's operations are closer to those of an asset management institution, relying on user reserves for high-yield investment portfolio allocation. While the returns are considerable, the credit risk is also relatively high.

In contrast, Circle is more akin to a banking model, emphasizing asset transparency, compliance, and low-risk management, without engaging in high-risk investments. Although the yields are lower, it has greater credibility within regulatory agencies and the financial system.

Liu Feng: Will regulators allow Tether's "high-yield, high-risk" model to exist in the long term? Especially in the event of a run, could it potentially cause systemic shocks to the entire crypto financial system?

Can Sun: This is a very real issue. Tether's market cap is more than double that of USDC, accounting for over 60% of the stablecoin market. If a liquidity crisis or major default occurs, it could trigger a "Lehman moment" for the crypto financial system.

To address this, many DeFi protocols and trading platforms have begun to hedge risks, such as diversifying the use of multiple stablecoins, setting position limits, or adopting stablecoin basket mechanisms to reduce reliance on a single stablecoin.

Zheng Di: Although Tether has not defaulted yet, under the backdrop of tightening regulations, it will either be forced to move toward transparency and accept regulation or continue to operate in the "gray area," with the latter's space becoming increasingly limited.

In contrast, if Circle can gradually penetrate the traditional financial system, such as establishing clearing partnerships with Visa, Stripe, and banks, it is likely to expand its market share in the long term. However, this path is slower, incurs higher operational costs, and has relatively limited profit margins.

Hongjun: It can be said that this is a game between high yields and compliant stability. Tether profits quickly and has high returns, but comes with significant risks; while Circle's path is stable, legal, and compliant, with sustainable but relatively limited income.

Can Sun: Yes. Tether's success relies on its first-mover advantage and rapid expansion during the early market gap; while Circle bets on regulatory trends and the long-term evolution of traditional financial systems.

Liu Feng: How do you view the development of these two models in the coming years? Is it possible for Circle to gradually catch up to Tether, or will Tether continue to maintain its lead?

Zheng Di: It's difficult to make a definitive judgment, as it depends on several key factors. First is the regulatory process—whether the U.S. can establish a clear stablecoin legal framework in the next two to three years; second, whether financial institutions are more inclined to cooperate with compliant models; and finally, whether Tether can continue to maintain high yields while effectively controlling risks.

I tend to believe that the stablecoin market will present a "dual-track" structure in the future: one track serving high-risk DeFi and offshore platforms, primarily led by USDT; the other track aimed at institutional clearing and compliant scenarios, dominated by USDC or other new compliant stablecoins.

Can Sun: I agree with this assessment. Just as the current financial system is divided into banking and shadow banking systems, the future of stablecoins may also head toward dual-track development. However, in key countries and core financial scenarios, the market share of compliant stablecoins is expected to gradually increase.

The Technological Evolution of Stablecoins and Emerging Application Scenarios

Hongjun: We have discussed the past and present of stablecoins; finally, I would like to ask you to look ahead at future development directions. What application scenarios might USDC enter next? Besides expanding market share, does Circle have any new strategic layouts?

Can Sun: Circle's current core strategy is to build a global settlement network. The company has launched a protocol called CCTP (Cross-Chain Transfer Protocol), which supports seamless transfers of USDC across multiple blockchains and connects with banking systems, essentially creating an on-chain dollar clearing system.

Compared to traditional dollar clearing processes, USDC offers advantages like real-time settlement, low costs, and transparency. If Circle can successfully connect various countries' payment systems with the USDC network, it could establish its position as the global clearing standard.

Zheng Di: Another important direction is the integration of AI and stablecoins. More and more AI companies are building automated payment systems for payroll, contract execution, cost accounting, and cross-border settlements, which are very suitable for completion through stablecoins.

USDC's on-chain transparency, programmability, and rapid settlement make it an ideal foundational settlement asset for AI enterprises. In the future, AI systems may directly access on-chain payment APIs, achieving full automation of fund flows, which will become an important new application scenario for stablecoins.

Liu Feng: It can be said that AI is becoming a "multiplier" for stablecoins. An AI system that operates around the clock, combined with a payment network that settles around the clock, will significantly enhance the efficiency and automation of fund flows.

Can Sun: Yes. Circle has collaborated with some AI automation companies to develop prototype products, including functions like automatic invoicing, bookkeeping, contract execution, and USDC settlement. Once these tools mature, the application of stablecoins will no longer be limited to the crypto trading field but will gradually integrate into mainstream business scenarios like corporate financial systems, SaaS platforms, and financial software.

The Future Landscape of Stablecoins and Winning Rules

Hongjun: How do you view the trend of traditional banks issuing stablecoins? For instance, JPMorgan's JPM Coin has already launched, and Wells Fargo, Citigroup, and others are also exploring similar projects. Will these banks become competitors to Circle?

Can Sun: Most stablecoins issued by traditional banks operate on private chains, limited to clearing between the banks themselves or specific large clients, forming a closed system that cannot connect to mainstream wallets or DeFi protocols.

In contrast, USDC is an open network that any individual or institution can use, and developers can freely integrate. This is akin to the difference between the internet and a local area network—banks' stablecoins are more like a local area network for internal use, while USDC is the open internet, with stronger compatibility and scalability.

Zheng Di: However, the power of banks should not be underestimated. They have a large customer base, extensive branch networks, and compliance advantages. If regulations loosen in the future, banks will have the ability to quickly promote their own stablecoins.

The key for Circle lies in establishing its position as "financial infrastructure" within a compliant framework. Once its stablecoin becomes the clearing layer of the mainstream financial system, it can create powerful network effects and first-mover advantages.

Liu Feng: How do you view the potential structural changes in the stablecoin industry in the coming years? Among various participants like Circle, Tether, traditional banks, and tech companies, who is more likely to emerge as the winner?

Zheng Di: Over the next five to ten years, stablecoins will gradually evolve into financial infrastructure. Projects with real long-term development potential need to possess three capabilities: first, to gain regulatory recognition; second, to achieve practical application in payment scenarios; and third, to have the ability to build a global clearing network.

From the current perspective, Circle is the only project that is likely to meet all three requirements simultaneously. Tether has strong profitability but significant shortcomings in compliance; bank-issued stablecoins have compliance advantages but closed technical architectures; stablecoins launched by tech companies have application scenarios but still face limited trust from users regarding their financial attributes.

Can Sun: Ultimately, the key to competition lies not in market capitalization but in who can become the "clearing foundation of the digital financial system." Just like today's SWIFT and VISA, the competition among stablecoins will be about multi-dimensional capabilities such as settlement efficiency, credit levels, regulatory compliance, and ecosystem building.