Market value nearly halved Coinbase’s investment in USDC reshapes the stablecoin landscape behind crisis response.

Author: ChainCatcher

For Circle, its sense of crisis is probably not only from the invasion of Web2 giants such as LianGuaiyLianGuail, but also from the successive pressures from competitors such as USDT and DAI stablecoins.

Circle CEO Jeremy Allaire’s sense of crisis seems to be overwhelming. Recently, Jeremy Allaire responded in an interview with Bloomberg that Circle has over 1 billion US dollars in cash to cushion the pressure from non-cryptocurrency companies like LianGuaiyLianGuail. And yesterday, Circle announced that Coinbase will be investing, and USDC will be launched on 6 new chains with the support of Coinbase.

For Circle, its sense of crisis is probably not only from the invasion of Web2 giants such as LianGuaiyLianGuail, but also from the successive pressures from competitors such as USDT and DAI stablecoins.

One fact facing Circle at the moment is that the market value of USDC has dropped from around 45 billion US dollars at the beginning of the year to about 26 billion US dollars, almost halving and reaching the lowest level in nearly 2 years. Meanwhile, the market share of competitors such as USDT and DAI has clearly been on the rise or experiencing corrections. Compared to the 66 billion US dollars at the beginning of the year, the market value of USDT has increased by 25.7% to 83 billion US dollars; and after experiencing the crisis of being unanchored from USDC, DAI’s market value has increased by more than 20% in the past two months with the help of RWA.

Under the crisis of the decline in the market value of USDC, we can also see the reshaping of the stablecoin market this year. On one hand, after being hit by regulatory measures, USDC’s crisis of being unanchored has caused significant changes in the top five stablecoins by market value; on the other hand, traditional blue-chip DeFi projects like Curve and Aave are actively launching native stablecoins; and some emerging stablecoin projects that rely on LSD and RWA also show signs of rising. Furthermore, with the launch of the stablecoin PYUSD by Web2 payment giant LianGuaiyLianGuail, an important factor has been added to the stablecoin market.

In addition to the changes in the landscape of stablecoin projects, the encryption core regions such as the United States, Singapore, and Hong Kong are also experiencing hidden movements in the stablecoin regulatory competition. Currently, the Monetary Authority of Singapore has taken the lead in releasing the “MAS Finalized Stablecoin Regulatory Framework,” providing a reference for promoting compliant stablecoins.

Market value almost halved, the anxiety and response of USDC

Regarding the decline in the market value of USDC, although Circle CEO Jeremy Allaire partly attributed it to the decision by Binance a year ago to reduce the adoption of USDC in order to promote its own stablecoin BUSD.

But in fact, in addition to Binance reducing the adoption of USDC, since the crisis of Silicon Valley Bank’s run on USDC at the beginning of the year, USDC has still been overshadowed by the crisis.

Based on the consideration of the security risks brought by the unanchoring of USDC, major holders of the original USDC such as Binance and MakerDAO have reduced or even completely sold their reserves of USDC. Recently, it was revealed that Binance had sold a large amount of USDC for BTC and ETH as reserve assets. The latest Proof of Reserves (PoR) released by Binance showed that Binance’s USDC balance decreased from 3.4 billion US dollars on March 1 to 23.9 million US dollars on May 1. And blockchain analyst Aleksandar Djakovic pointed out that after the collapse of Silvergate and Signature banks, Binance purchased about 100,000 BTC and 550,000 ETH, totaling about 3.5 billion US dollars, during the period from March 12 to May 1, which is the same as the surplus amount of USDC they hold, indicating that Binance sold USDC and exchanged it for BTC and ETH.

During the period from December 2022 to June 2023, the balance of Binance Reserve, source: Binance

Meanwhile, MakerDAO exchanged a large amount of USDC for US dollars to purchase US bonds. From 2021 to May 2023, in MakerDAO’s balance sheet, PSM stablecoins (over 70% of which are USDC) occupied more than half of MakerDAO’s assets in most cases. However, after mid-May this year, the proportion of MakerDAO’s RWA assets soared to about half, while its stablecoin assets dropped to less than 15%. As of now, MakerDAO’s stablecoin assets are approximately $700 million, while its RWA assets are approximately $2.5 billion. In March before the USDC unpegging, MakerDAO’s stablecoin assets reached nearly $4 billion. This means that at least $2 billion of USDC in MakerDAO’s asset reserves may have been converted into RWA assets such as US bonds.

Source: Dune Dashboard @SebVentures

Not only decentralized stablecoin protocol MakerDAO has significantly reduced its USDC assets, but algorithmic stablecoin Frax is also continuously exploring the introduction of RWA to reduce its dependence on USDC. The upcoming upgrade of Frax Finance V3 will focus on changing this situation. Sam Kazemian, the founder of Frax Finance, mentioned the idea behind this upgrade during interactions with the community: FRAX has been operating under the assumption that it is not decoupled from USDC since its inception. However, when USDC is unpegged, the redemption value of 0.95 USDC + 0.05 FXS falls short of $1.00. Therefore, FRAX v3 will change this situation through many new AMOs and functions tied to “sovereign dollars”.

With Binance, MakerDAO, and others selling a large amount of USDC, the market value of USDC has also been continuously declining. According to CMC data, the market value of USDC has dropped from $45 billion at the beginning of the year to about $26 billion, a decline of 42%, and it has been on a downward trend for six consecutive months.

Furthermore, with the recent announcement of traditional payment giant LianGuaiyLianGuail entering the market with PYUSD, the competitive pressure on USDC has further intensified. USDC and PYUSD can be considered direct competitors, both being stablecoins regulated in the United States and having similar customer bases. However, PYUSD, as a Web3 payment giant, has advantages such as a user base of 400 million people and a strong brand.

In the face of this competition between new and old forces, Circle and Circle CEO Jeremy Allaire have been actively voicing their opinions recently. On one hand, Circle CEO Jeremy Allaire revealed Circle’s income in an interview with Bloomberg, proving Circle’s good operational performance despite the decline in market value. Jeremy Allaire stated that Circle’s revenue for the first half of this year was $779 million, surpassing the full-year revenue of $772 million in 2022; the adjusted EBITDA for the first half of the year was $219 million, also exceeding the full-year revenue of $150 million in 2022. However, USDC stablecoin is just one part of Circle’s business, and the portion related to USDC has not been disclosed.

In the face of competition from PYUSD, Jeremy Allaire stated that his asset-liability has $1 billion in funds, enough to cope with the competition. In addition, Jeremy Allaire also wrote that despite the continuous speculation about the United States, the adoption rate of USDC outside the United States has reached 70%, and some of the fastest-growing regions are emerging and developing markets. Jeremy Allaire seems to imply that the main customer base of PYUSD is in the United States, while USDC is mainly outside the United States, and the competition between the two is not so intense.

In addition to anxiety, USDC is also taking measures to cope with the decline in the market value of USDC and the pressure from new competitors. On the one hand, Circle focuses on developing emerging markets outside the United States, such as obtaining a cryptocurrency payment license in Singapore and considering issuing stablecoins in Japan according to new regulations.

On the other hand, Circle is also making efforts in ecological cooperation. According to an official announcement from Coinbase yesterday, Circle will welcome Coinbase’s investment, and with Coinbase’s support, USDC also plans to launch on 6 new blockchains. It is worth mentioning that there have been successful precedents of stablecoins cooperating with exchanges, such as USDT and Bitfinex, BUSD and Binance, which have indeed brought a win-win situation.

Previously, Circle also reached an agreement with OKX to use USDC as payment gas fees, launched USDC on Arbitrum, and also launched a “Wallet as a Service” platform for developers. In the future, it will also launch stablecoin cross-chain payments and simplified smart contract development platforms. Recently, Circle announced the launch of a $100,000 USDC fund support ecosystem funding program to attract more ecological partners to use USDC. In addition, Circle has opened up throttling, restarted the purchase of US government bonds as USDC reserve assets to obtain higher returns, and saved operating costs through layoffs.

New Battle of Stablecoins: Regulation, RWA, Yield, Web2 Giants

USDC’s market value continues to decline, and the stablecoin market structure is also being reshaped.

First of all, according to the “Stablecoin and CBDC Report” released by the cryptocurrency analysis platform CCData, the total market value of stablecoins has continued to decline to the range of $124 billion, setting a new record low for the market value of stablecoins since August 2021, and also the 17th consecutive month of decline in the market value of stablecoins.

During the continuous weak period of the overall market value of stablecoins, the stablecoin market has undergone significant changes and fluctuations since the beginning of the year. The leading mainstream stablecoins have all been affected to varying degrees, and there have been significant changes in the ranking of stablecoin market value compared to the beginning of the year.

First, BUSD was hit by regulatory crackdown in February this year. The New York Department of Financial Services (NYDFS) announced an investigation into BUSD issuer LianGuaixos, and shortly thereafter, the U.S. Securities and Exchange Commission (SEC) announced a lawsuit against LianGuaixos for BUSD-related issues. BUSD, which was consecutively hit by regulation, saw its market value drop from $16 billion in February to $3.3 billion, a decrease of nearly 80%. Its position as the third largest stablecoin after USDT and USDC was also replaced by DAI.

Furthermore, due to the bank run in Silicon Valley Bank, USDC, which holds reserves in it, has also experienced a run and de-anchoring risk. This has caused large holders of USDC reserves such as Binance and MakerDAO mentioned earlier to sell off USDC and reduce their reliance on it. Currently, USDC has dropped from a market cap of $45 billion at the beginning of the year to about $26 billion, nearly halving its value and reaching its lowest level in nearly two years.

Originally ranked after BUSD in terms of market cap, DAI experienced a significant drop in market cap after the USDC de-anchoring incident, but was later revived by the strategy of exchanging a large amount of its reserve asset USDC for US Treasury bonds. Its market cap has increased by over 20% in the past two months and has risen to become the third largest stablecoin.

Despite being criticized for lack of asset transparency, USDT, which has consistently held the first position, has benefited from the BUSD and USDC incidents and has continued to increase in market cap. Compared to the beginning of the year when it was $66 billion, USDT’s market cap has already increased by 25.7% to $83 billion.

Meanwhile, TUSD (TrueUSD), the fifth largest stablecoin, has quietly and rapidly risen amidst the competition among the top four stablecoins. Since March, its market cap has more than doubled to about $3 billion, making it one of the fastest-growing stablecoins.

Data provider Kaiko’s data shows that TUSD’s share of stablecoin trading volume on centralized cryptocurrency exchanges has risen from less than 1% at the beginning of the year to 20%.

The rapid rise of the relatively unknown TUSD has also sparked speculation. The Wall Street Journal recently raised questions about the behind-the-scenes manipulation of TrueUSD in an article titled “Suspicion in the Crypto World: Who is Controlling the Rapid Growth of Stablecoin TrueUSD?”. The article mentions that TrueUSD was created in 2018, but later changed its name to Archblock and received funding from Peter Thiel’s Founders Fund, StartX (affiliated with Stanford University), Andreessen Horowitz, and Jump Trading.

Currently, the co-founder of TrueUSD is involved in a fierce legal dispute regarding An’s departure from the company. In a recent lawsuit, An stated that Justin Sun had discussed acquiring TrueUSD in 2020, but before the deal was finalized, An, as the CEO, was ousted from the parent company of this stablecoin. His statements have intensified market speculation that Justin Sun is the behind-the-scenes orchestrator of TrueUSD’s sudden growth. Earlier in July, Zhao Changpeng, a partner at the cryptocurrency investment firm Cinneamhain Ventures, revealed that TUSD is related to Huobi, Justin Sun’s family, and partners.

Another rapidly growing stablecoin outside of TUSD is FDUSD from First Digital Labs. After being listed on Binance last month, its market cap surged by 1,410% in August, reaching $305 million. Currently, it ranks 11th in terms of stablecoin market cap, just behind Frax. DFDUSD is issued by FD121 Limited, a subsidiary of First Digital Limited (branded as First Digital Labs), a custodian company based in Hong Kong. On June 1st of this year, Zhao Changpeng announced that First Digital would issue stablecoins on the Binance Smart Chain. Due to the connection between FDUSD and “Hong Kong” and Binance, it is speculated to be an alternative solution chosen by Binance to replace BUSD.

Among the top five stablecoins, we can see that DAI has achieved a “comeback” by replacing its stablecoin reserve assets with RWA assets such as US Treasury bonds to generate income, and distributing part of the income to users. This year, other stablecoins, such as Curve and Aave, have also entered the market to launch interest-bearing stablecoins. Similarly, both established blue-chip DeFi projects like Curve and Aave, as well as emerging DeFi projects like Lybra Finance and OpenEden, are leveraging LSD and RWA assets to promote the development of interest-bearing stablecoins to varying degrees.

In May of this year, Curve’s native stablecoin crvUSD was officially launched. Currently, crvUSD supports ETH, wbtc, wsteth, and sfrxETH as collateral for liquidity mining. According to Curve’s website, the amount of crvUSD minted has exceeded 120 million. Aave followed suit and launched its native stablecoin GHO in July. Similar to DAI, GHO uses Aave’s aTokens as collateral assets for minting. The difference is that aTokens are interest-bearing assets. The amount of GHO minted by Aave has exceeded 20 million.

Other emerging players in the field of interest-bearing stablecoins, such as Lybra Finance and Prisma Finance, also support the minting of interest-bearing stablecoins with LSD assets. Currently, Lybra Finance’s stablecoin eUSD has a market capitalization exceeding 180 million US dollars, ranking fifteenth among stablecoins. In addition, the on-chain US Treasury bond protocol represented by OpenEden allows users to invest in US Treasury bonds using its native stablecoin TBILL to earn annualized returns. Currently, OpenEden’s total value locked (TVL) has exceeded 12 million US dollars.

In addition to changes in the landscape of mainstream stablecoins, the competition in interest-bearing stablecoins has intensified. This lucrative business of stablecoins has also attracted Web2 payment giants such as LianGuaiyLianGuail, whose stablecoin PYUSD has a current circulation of over 30 million. With the entry of LianGuaiyLianGuail into the stablecoin market, Circle CEO and other crypto insiders predict that more non-crypto practitioners will enter the stablecoin market.

Regulatory frameworks gradually implemented, will compliant stablecoins lead crypto into the mainstream?

Although the total market capitalization of stablecoins has declined, the entry of Web2 giants like LianGuaiyLianGuail may drive the implementation of compliant stablecoins. Currently, the regulatory frameworks for stablecoins in core crypto regions such as the United States, Singapore, and Hong Kong are gradually becoming clear.

The regulatory crackdown by the US SEC on BUSD at the beginning of the year once shook the confidence in the stablecoin market. However, the launch of PYUSD after a six-month hiatus is seen as accelerating the implementation of the US stablecoin bill.

When LianGuaiyLianGuail announced the launch of PYUSD, Patrick McHenry, Chairman of the US House Financial Services Committee, expressed support, stating that “stablecoins issued under clear regulatory frameworks are expected to become the pillar of our 21st-century payment system. LianGuaiyLianGuail’s stablecoin makes it more important than ever to continue pushing for legislation.”

Earlier, at the end of July, the U.S. House Financial Services Committee announced the passage of the “Payment Stablecoin Transparency Act (Draft)”. This bill establishes a regulatory path for approving and regulating stablecoin issuers, while creating unified federal minimum standards for payment stablecoins.

In addition to the United States, the Monetary Authority of Singapore (MAS) has been the first to release the “MAS Finalized Stablecoin Regulatory Framework”. This legal framework for stablecoin regulation defines the scope of regulatory use and the key requirements in multiple dimensions such as reserve assets and information disclosure that issuers must meet before issuing stablecoins.

Regarding stablecoin regulation in Hong Kong, in July, Hong Kong Financial Secretary Paul Chan Mo-po revealed in a public interview that the Hong Kong Monetary Authority (HKMA) is formulating a regulatory framework for stablecoins and plans to conduct a second round of public consultation within this year, with the aim of implementing regulatory arrangements in the 2023/2024 financial year.

Many cryptocurrency enthusiasts believe that with the gradual implementation of regulations, compliant stablecoins may become a key factor in the involvement of cryptocurrencies in the economic mainstream.

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