Stablecoin USDC To Be Backed 100% By Cash And Treasury Bills
The promise of 100% backing comes after the stablecoin faced criticism for only having 61 percent of their reserves backed by cash and cash equivalents.
Covered
- USDC‘s New Backing Promise
- Stablecoin Competition
- Improvements To Backing
USDC’s New Backing Promise
Via their blog, Circle announced that their stablecoin, USDC, will change the makeup of their cash reserves. Instead of holding only 61 percent in cash and cash equivalents, USDC’s reserves will be made up entirely of cash and US Treasury Bills.
“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,” Circle said via their blog.
Previously, US treasury bills and cash made up about 73 percent of their reserves. With the upcoming changes, Commercial Paper, Yankee CDs, and Corporate Bonds will no longer be a part of the composition.
Circle didn’t give a timeline for when the reserves will move to its new composition, but said,
“These changes are being implemented expeditiously and will be reflected in future attestations by Grant Thornton.”
Stablecoin Competition
Circle faced significant criticism after it announced its 61 percent backing back in July. Previous to that, USDC maintained that they were 1:1 backed by USD.
One of USDC’s competitors PAX, announced recently that they are 94% backed by cash and cash equivalents. While, the other 6 percent is in Treasury Bills.
Back in March, Tether announced that they were 76 percent backed by cash and cash equivalents. Which appears to be a larger percentage than USDC. However, they included Commercial Paper in that mix. USDC listed Commercial Paper separately.
USDC said they only had 9 percent commercial paper. Whereas, Tether said commercial paper made up 65 percent of their cash reserves.
The move to a 100% cash backing would put them ahead of their biggest competitor Tether. In addition, it would bring them to a similar composition to what PAX disclosed.
Improvements To Backing
Although, the new reserve backup will still not be 1:1 backed by the greenback, it is an improvement over what Circle announced back in July.
US Treasury Bills are considered safe investments. Essentially, they are loans to the U.S. government who then pays you back with interest. They are redeemable instantly, depending on which timeframe you choose. Circle mentioned they’re purchasing US Treasuries for their reserves.
Similarly, Commercial Paper is a loan that pays back interest, except in this case it’s to a corporate entity rather than the government. Commercial Paper is considered riskier than Treasury Bills, because the government is far less likely to default.
So, even if it isn’t necessarily backed by cash completely, having a portion of its reserves in Treasury Bills puts USDC in a better position to pay back users. They are quickly reedemable, thus negating any bank run concerns. Not to mention, they earn interest for USDC. So instead of losing value to deflation every year, Treasury Bills safely pad the stablecoin’s cash reserves.
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