What is USD Coin (USDC) and what is its history with Circle and Coinbase?

USDC
Key facts:
  • USDC is a project that was born in 2018 by the Center Consortium.
  • Like other stablecoins, USDC is pegged 1:1 to the US dollar.
  • Due to Circle and Coinbase’s regulatory licenses, USDC is widely accepted in the US and Europe.
  • Each USDC is issued based on the Center’s holdings of dollars and dollar derivatives.
  • USDC is compatible with Ethereum, Algorand, Solana, Stellar, and even Polkadot networks.

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USD Coin (USDC) is one of the main stablecoins in the ecosystem, being the second of these cryptocurrencies with the highest market capitalization – only behind Tether (USDT) -. The asset is managed and financed by two of the main companies in the medium: the American exchange Coinbase and the financial services firm Circle.  

Being a stablecoin, it is designed so that its value emulates that of a national currency and does not have large variations. In the case of USDC, the price of the asset is associated in a 1:1 relationship with the US dollar.  

What is a stablecoin?

Stablecoins are tokens issued through smart contracts that are registered on a blockchain and whose value is linked to an external asset, such as national currencies or precious minerals. Also known as “stable cryptocurrencies”, due to their translation into Spanish, these are assets that function as digital representations of the dollar, the euro and even gold. 

USDC is available on networks such as Ethereum, Algorand, Arbitrum, Avalanche, Near, Polkadot, Solana, Base, Celo, Flow, Hedera, Cosmos, Polygon and skSync. Likewise, users can also operate with this stablecoin through wrapped tokens, as is the case in BNB Smart Chain and Fantom.  

USDC is a token created based on smart contracts. Source: Crypto Logo

Among its most notable features is the fact that it is one of the most regulated and supervised stablecoins on the market. Belonging to two companies with offices in the United States, Coinbase and Circle, USDC reserves are monitored monthly by the United States Securities and Exchange Commission (SEC).

Users can review monthly dollar movements in Circle’s reserve fund. Source: BlackRock. 

With this vote in favor of security, USD Coin’s marketing is oriented towards its stability and trust . For example, it is ensured that all stablecoin reserves come from physical dollars and currency derivatives. A promise that is contrasted with the transparency stumbles that Tether has had regarding its funds.  

Likewise, USDC is described by its creators as “an open, secure, interoperable and trusted token”; betting on a more conservative public interested in minimizing financial risks.  

Who created USDC?

The history of USD Coin begins in 2018. At that time, the cryptocurrency exchange Coinbase and the digital finance firm Circle decided to create the Center Consortium to issue digital currencies with stable prices.  

What is the Center Consortium and what is its role in USDC?

Since its creation in 2018, Center was the entity in charge of managing USD Coin’s dollar reserves, issuing USDC tokens and burning those units that were withdrawn by their owners. However, in 2023, in search of greater regulatory support, the organization was eliminated and Circle took control of the project.  

with a white paper explaining the technical operation of the project and its intentions, Center entered the market by mid-2018 along with the organization’s first stablecoin: USDC. The asset, at that time, was issued only in Ethereum and entered a market with heavyweights such as Tether (USDT), Paxos Standard (PAX) or TrueUSD (TUSD).  

Almost two years after its launch, USDC began to taste the honeys of success. The stablecoin reported the first issuance peaks, reaching 2 billion digital dollars circulating in cryptocurrency networks. By 2022, its presence in the market was no longer debatable: it had reached the record of 55 billion dollars in issued assets.  

USDC is the sixth cryptocurrency with the largest market capitalization. Source: CoinMarketCap. 

The recipe for fame seems to be linked to the companies that supported the consortium. And Coinbase, with a presence in the cryptocurrency market since 2012, and Circle with more than 11 years of expertise and a license to operate in New York ( bitlicense) , contributed greatly to the popularity that USDC has gained in recent years.  

Who is behind Circle, Coinbase and USDC?

The creation of USD Coin has been motivated by the directors of Circle and Coinbase. We are talking about Jeremy Allaire: internet technology entrepreneur, creator of Macromedia MX and CEO of Circle. On equal footing is Brian Armstrong: an American millionaire, businessman and investor who currently serves as CEO of Coinbase.  

The importance of these companies in the trust of USDC was established in 2023. After major regulatory turbulence that put stablecoins in the eye of the storm, Circle and Coinbase decided to dissolve the Center consortium. In this way, Circle became the new issuer and administrator of USDC, while Coinbase was confirmed with a significant portion of the stablecoin reserves. 

Jeremy Allaire founded Circle in 2013. Source: X.com 

How does USDC work?

To understand how USD Coin works, it is important to know that there are several types of stablecoins. USDC is part of the stable cryptocurrencies backed by the fiat system, since each issued token has its equivalent in a bank account or reserve fund.  

This system works by depositing US dollars or dollar-based assets into an account belonging to Circle. This process is done through the Circle Mint service, which is in charge of creating new tokens and eliminating those that no longer have their support in the reserve. But how is this done? 

Well, when a user contacts Circle Mint to be granted USDC tokens, the company provides a bank account where the amount of money in dollars that they want to have in a cryptocurrency network will be deposited. For example, if a company wants to have 10,000 USDC in Ethereum, it will need to deposit 10,000 US dollars in Circle’s reserve fund.  

What are the fees associated with USDC?

The fee applied to a USDC transfer varies from platform to platform. For example, on exchanges like Coinbase, buying USDC does not have any fees. However, transferring these stablecoins on networks like Ethereum can become expensive if it is congested with transactions or there is an increase in the price of gas. As USDC has several supported blockchains, the fees you may end up paying on networks like Solana, Stellar, or Algorand are significantly lower than those on Ethereum. 

When the money is deposited in the fund, Circle Mint is responsible for creating the requested amount of tokens through a smart contract. This tool allows you to generate the units requested by the client, as well as an address with which the money can be managed. Thus, the $10,000 reserve fund is now represented digitally in the preferred network ledger.

When a user wants to withdraw their money from the cryptocurrency network and receive dollars in return, they must also contact Circle Mint. The service is responsible for providing an address for the USDC to be sent and will then send the same amount of money to the client’s bank account.  

The USDC sent are not blocked in an address as other stablecoin projects usually do, but Circle is responsible for eliminating these tokens (or burning them as it is popularly known) so that the 1:1 equivalence between each token unit and each dollar unit. In this way, they maintain control over the price of the asset.  

Is USD Coin always worth one dollar?

No and yes. Like any financial asset, the value of USDC is largely based on supply and demand. Although the creation of USD Coin units is 1:1 with the dollar reserves of Circle and Coinbase, the internal market for USDC on cryptocurrency networks can cause its price to differ. An overselling of the asset may lead USDC to decouple from the dollar. Likewise, an overbought can raise its price and also lose parity. To avoid this situation, companies usually issue more tokens, burn certain units or let the market itself stabilize to regain parity. 

It is worth noting that both the issuance and burning of USDC is carried out in the cryptocurrency network of the client’s preference. Therefore, these assets can circulate in 12 different ecosystems, even having their own transfer mechanism between networks. This system is known as Cross-Chain Transfer Protocol (CCTP) and has been available since 2022 to burn and issue units on different blockchains.  

The acquisition of USDC does not have to be done solely by Circle Mint. Currently, there are multiple cryptocurrency exchanges that offer USDC buying and selling markets at the spot or person-to-person (P2P) level.  

In addition to these services, for integrated operation with decentralized applications (Dapps), Circle offers users and developers services to integrate USDC into their wallets and payment methods. This system is known as Web3 Services, which allows you to integrate smart contracts to send USDC to clients or customize commissions so that they are cheaper for certain users.  

What are the differences between USD Coin and other stablecoins?

The stablecoin market is broad and each of these projects offers strengths and weaknesses in different areas. Despite the variety, we can compare USDC with the main stable cryptocurrencies on the market and their different ways of working.  

Let’s go first with the champion of cryptocurrency-backed stablecoins. We are talking about DAI from MakerDao, an asset with a price 1:1 with the US dollar and whose reserves are managed in Ethereum ethers. This is the biggest difference that DAI has with USDC, since the reserves of this second cryptocurrency are based solely and exclusively on national currencies and, especially, on the US dollar.  

Dai is one of the most used stablecoins in decentralized finance (DeFi). Source: CoinMarketCap. 

USDC also differs greatly from algorithmic stablecoins. In these tokens, the price of a national currency, such as the dollar, is followed through algorithms and market indices. In this sense, tokens like Ampleforth (AMPL) do not have physical or digital reserves to maintain parity with another cryptocurrency, as if USDC does with reserve funds. 

With the collapse of Terra, algorithmic stablecoins have lost popularity. Source: CoinMarketCap. 

Tether and USDC are the most similar stablecoins, since both have reserves in dollars and are anchored to this currency. In the case of Tether, it is a stablecoin with greater trading volume than USDC. USD Coin, on the other hand, has a more stable regulatory approach and greater transparency in its backing funds.    

Tether is one of the most liquid stablecoins on the market, but its parity fluctuates. Source: CoinMarketCap. 

What are the advantages and disadvantages of USDC?

Advantages

  1. Protection against volatility: The main objective of stablecoins is their ability to maintain a constant price anchored to a national currency. With this, traders can use USDC to shelter from the volatility of cryptocurrencies or explore different markets.   
  2. Sending remittances in a matter of seconds: Unlike international bank transfers that can take several days to process and are highly expensive, stablecoins like USDC are confirmed in a matter of seconds and with relatively low fees.  
  3. Digital dollar exposure: Some people seek to protect their savings from inflation with stronger national currencies, such as the dollar and euro. In the case of countries like Venezuela and Argentina, USDC may be an option of interest to gain exposure to the dollar without having to have physical bills. 
  4. A highly regulated stablecoin: Because Coinbase and Circle are two companies that undergo constant audits by US regulators, USDC is considered to be one of the stablecoins with the greatest security in its reserves and transparency in its funds.  

Is USDC better than a savings account?

Savings accounts and stablecoins are very different financial tools from each other. The first is services affiliated with a bank, where a client’s funds are recorded in a national currency and can integrate functions of interest. Stablecoins like USDC, on the other hand, are currencies and their acquisition does not depend on a banking entity. Users can access it through an exchange or the issuing company. Furthermore, USDC is not limited to capital savings or storage services, but can be used to do arbitrage trading or to collect profits from a trading operation.  

Disadvantages

  1. Difficulty in generating profits: Although there are financial tools that allow generating interest on stablecoin funds, tokens such as USDC are not commonly used to generate profitability. Unlike other cryptocurrencies such as bitcoin, ether or ADA, USDC does not change price or produce profits.  

In appearance, the Circle firm points out

USDC is not designed to inherently generate returns for holders, increase in value, or accrue financial benefits to the USDC holder. Circle.com

  1. Centralized and enterprise service: As USDC is a token issued by a private company, much of its services are carried out centrally. In this way, users are more vulnerable to experiencing transaction censorship, blocking of funds, and even theft.  
  2. Lack of privacy: Hand in hand with the centralization of services and high regulation of USDC, this token has much less privacy and anonymity than other cryptocurrencies such as bitcoin, ether or monero.  
  3. Risk of loss of parity: All stablecoins are vulnerable to a greater or lesser extent to the loss of parity with the currency to which they are pegged. This translates for said assets as the total loss of their value and usefulness. In case a stablecoin is not properly backed, the price can collapse and a monetary loss like what was witnessed with Terra can occur.  

What are the risks of investing in USDC?

Every cryptocurrency is exposed to financial risks and stablecoins are not spared. Therefore, when a person acquires these assets, he must take into account that he is exposing himself to the possibility of losing money or not receiving the desired service. 

In the particular case of stable cryptocurrencies such as USDC, the greatest risk is the loss of parity. As these assets emulate the price of another currency and generate this link through backup funds, any disruption in the reserves of the USDC issuing company (Circle) can generate a collapse in its price. Likewise, an uncontrolled supply or demand for the token can cause the currency to lose its 1:1 relationship with the US dollar.  

USDC, like other stablecoins, has the weakness of operating centrally. The fact that there is a company that must be the guarantor of the issuance and custody of USDC, and its physical support, nullifies one of the most important advances of Bitcoin and decentralized cryptocurrencies. The lack of need to trust a central entity to ensure the value of money.  

In this regard, Circle points out that certain users can be blocked or not allowed to transfer: 

Circle reserves the right to block the transfer of USDC to and from an on-chain address as permitted by the blacklisting policy. Circle.com

Due to the lack of decentralization, USDC is a poor option when seeking greater privacy and self-custody. Any company that wishes to create new units of USD Coin must provide banking information to carry out this operation, as well as the vast majority of exchanges that accept this asset require users to take KYC measures. With this, users lose the opportunity to remain anonymous and the ability to move their money autonomously.  

Last but not least, as USDC is a representation of the US dollar, it is a cryptocurrency that is more sensitive to regulatory measures in the United States and traditional markets.  

Yes. The regulatory support that USDC has is one of the most stable in the market. Circle has worked in recent years to obtain licenses to operate in the United States and Europe, as well as in other parts of the world.  

USDC is regulated as a form of stored value or prepaid access under the laws governing the transmission of money (or its legal equivalent) in the various states and territories of the US. For the avoidance of doubt, these Terms only apply to USDC issued by Circle. Circle.com

Despite the acceptance of USDC in countries with strict regulations, there are other countries that do not fully accept the operation of any cryptocurrency in their territory. This is the case, for example, of Bolivia in Latin America. Therefore, we recommend that those interested in acquiring USDC, before carrying out any operation with this stablecoin, first inform themselves about the regulations in their country regarding cryptographic assets.  

Where to buy and sell USDC?

Some of the exchanges that offer services for the purchase and sale of USD Coin are:  

  • Binance 
  • Coinbase
  • Crypto.com 
  • Kraken 
  • Okx 
  • Robin Hood 
  • Bitso 
  • lemoncash 
  • Huobi