Yesterday USDC stablecoin issuer Circle announced fundamental changes in USDC governance. Previously, the stablecoin was governed by the Centre consortium, which until now only consisted of Circle and Coinbase as members. Centre is being disbanded and governance will rest with Circle alone. Additionally, Coinbase has invested in Circle, and will continue to earn interest on the reserves, with Coinbase possibly earning more than Circle.
In many ways, the agreement is a formalization of what was already the case – Circle has been substantially managing USDC on its own. Going forward, the companies are likely to compete with each other in multiple ways. For example, Circle launched a wallet as a service solution and Coinbase offers something similar. BlackRock has collaborations with both firms.
The cosy relationship between stablecoins and particular exchanges has already attracted attention from regulators and has been observed by the Bank for International Settlements (BIS) on multiple occasions. And Paxos was instructed to cease issuing Binance USD.
Additionally, the antitrust issues of a large crypto exchange also being associated with stablecoin issuer could become an issue in future, but that’s a fair way off. Although it’s a point revisited later.
Nonetheless, the Centre consortium represents a big idea which didn’t quite come to fruition. It’s worth exploring because the concept might be more viable as stablecoin legislation becomes clearer. Or not.
Centre: the end of a big idea
The concept behind Centre was that there could be many issuers of USDC, not just Circle. In other words, it was a far less centralized idea than how stablecoins have evolved.
There are certainly pros and cons to the concept. Say one of the issuers turned out to be dodgy or less risk averse. They go bust and some of the reserves are lost. That loss would impact the entire stablecoin, which could lose its peg. However, rationally, the price decline should be equivalent to the proportion of reserves held by that issuer.
That also highlights the upside of having multiple issuers. The credibility of one institution might tarnish the stablecoin, but only up to a point.
Any loss would likely be socialized over the other issuers, or failing that, the token holders.
Another downside is that one or two of the issuers are likely to dominate, cancelling out some of the benefits. It is most desirable to attract multiple issuers in the early days but also harder to accomplish until a stablecoin is successful. That’s perhaps why there were no additional Centre members. And once a stablecoin has traction, there’s less incentive to open access to new issuers.
However, Centre is potentially a blueprint for how future new stablecoins could compete with incumbent large issuers. In some ways, Meta’s Libra / Diem concept followed a similar playbook. Arguably as legislation around the world becomes clearer, there could be more opportunities for this kind of structure rather than less.
The profit split
The details of the Circle-Coinbase profit split are notable. Each will earn the interest on the reserves for the wallets they control. For the rest of the balances – the vast majority of the funds – the interest earnings will be split 50:50.
Currently it appears that Coinbase might earn more money off USDC than Circle. For example, on Ethereum the main Coinbase wallet has $228 million compared to $122 million for the Circle wallet. But these balances are tiny compared to the overall USDC market capitalization of $26 billion.
Is the profit split indefinite?
However, it’s not inconceivable that a few years down the line, antitrust regulators might look at the revenue split and say this encourages Coinbase to favor USDC too much and inhibits the adoption of other stablecoins in the United States.
If the revenue share is indefinite – without a fixed term – this could weigh on a potential future IPO by Circle. Because if Coinbase was forced by regulators to unwind the contract, they will expect compensation. And the figure is likely to be a huge, forcing Circle to issue a large amount of equity to pay out Circle.
In Circle’s shoes, I would have negotiated for a fixed term of five or ten years and provided a chunk of equity to Coinbase now. The downside is regulators might not be keen on Coinbase owning a significant stake in the current environment. We’ve asked Circle but didn’t get a response in time for publication.
If it were a fixed term contract, Coinbase would have to disclose that as it is material to future revenues, and there have been no regulatory filings on this topic. Last quarter Coinbase earned $151 million from USDC out of total revenues of $708 million or 21%.
Meanwhile, circling back to Centre, its site is already redirected to the Circle announcement. Centre was also responsible for the open source Verite digital identity solution co-founded by Centre, Circle and Block (formerly Square).
In other related news, Circle announced it will launch USDC on another six blockchains. Wrapped USDC is currently quite significant. For example, Arbitrum has almost $1 billion. Natively issued stablecoins are far safer than wrapped ones.
