Circle CEO: For Banks, Digital Dollars Demand Stablecoin Strategy

Diem may be a shadow of what some proponents promised it would be back in 2019 — namely, a seismic shift for the monetary system itself.

What once was billed as a “new” currency, via global stablecoin to be composed of a “basket” of multiple fiat currencies, will instead be backed one to one by the U.S. dollar, with other currencies to be rolled out at an as-yet undetermined date.

The age of digital dollars, though, is dawning, where central banks and traditional financial institutions (FIs) must develop digital strategies as physical cash becomes less attractive.

In an interview with Karen Webster, Jeremy Allaire, CEO of Circle, noted that the stage is increasingly set for a wider embrace of digital dollars for real-world transactions — distinct from bitcoin, Diem, trading and speculation.

The numbers seem to back up that contention. Circle recently announced that there is $3.3 billion worth of U.S. digital dollars (USDC) in circulation, up 500 percent year on year. That growth comes at a point of inflection where, as Allaire noted, “many things are happening simultaneously. The obvious piece is the rapid maturation of digital assets as an asset class.”

He said major corporations are moving their treasuries into bitcoin. Square is an example. And, as has been widely reported, JPMorgan Chase has launched its own digital coin — a marked reversal from just a few years ago, when CEO Jamie Dimon dismissed cryptos entirely.

For many of those firms, it’s time to play catch-up — because a wide swath of traditional finacial institutions (FIs) and banks don’t have a stablecoin strategy in place, at least not yet.

But bit by bit the path is becoming clearer.

The financial services industry has become increasingly entrenched in the cryptocurrency ecosystem as well, as banks and other firms have been cleared to become regulated custodians — not just in the United States, but around the globe.

And in terms of the mechanics of it all, there had been some doubt that scalability would be in the cards — that throughput would be enabled across blockchain to facilitate commerce across consumer and corporate use cases.

Allaire noted that Circle has been launching USDC across a number of networks and exchanges, with transactions already numbering in the tens of thousands per second. For instance, Visa recently added USDC to as an option for the more than 60 million merchants on its network, according to a December announcement.

“The infrastructure now can settle — with irreversible settlement finality — in as little as 350 milliseconds, which is significant,” Allaire told Webster.

It’s About More Than Just Bitcoin

But beyond the underpinnings of technology, Allaire said it’s important to make the distinction between cryptos as a group and what’s being spent, bought or held for investment (or used for speculation). In other words, a bifurcation exists between digital assets and digital currencies.

Cryptocurrencies and crypto exchanges are increasingly in regulators’ crosshairs for AML/KYC violations and possible fraud, and discussion is also fixed on how the currencies themselves should “act” — in other words, how they should be created and disseminated.

Allaire said there are indeed digital currencies that are designed to act like commodity money. For example, bitcoin is designed to act as a hedge against inflation or against gold or other assets and can’t be debased. And importantly, bitcoin’s value and trading aren’t dependent on any government or bank.

“Bitcoin does have the ability to transact in minutes on the internet with a relatively low cost,” Allaire said. “It does have those attributes. Whether it’s used as a day-to-day payment instrument is a really different story.”

Looking beyond bitcoin — the marquee name in crypto — Allaire noted that people who are participating in crypto markets in general are comfortable with using digital assets to store things and transmit value. That’s where stablecoins come in.

“If you want to have something used in payments and settlement, today it has to be based in fiat currency,” he said. “It has to be based in a payment currency that you use for trade and commerce.”

And although Diem might be receding a bit into the background, banks and central banks are looking at the tech giant’s initiatives and developing their own counterstrategies. Allaire said FIs and FinTechs have been adopting USDC — the fastest-growing compliant, regulated offering — over the near term.

Opening Up To Open Source

Allaire said USDC is different from other stablecoins such as the JPM Coin in that USDC is built on a consortium model and a set of public standards.

“It’s entirely open source, and it’s essentially like an open [application programming interface] API developer around the world because it exists on public blockchain networks,” he said.

By contrast, the JPM Coin is a proprietary coin that’s run on a managed, closed structure only available through permissioned access. Allaire likened the open-access model to the internet — which, as you might have noticed, has grown rather nicely through the decades.

Allaire said digital fiat is the internet’s next logical piece. “There are two missing layers of the internet — money and identity, and blockchains as a core,” he said. “I think a blockchain is like an operating system for the internet. This is a new type of operating system that is geared toward financial applications and recordkeeping applications.”

It’ll take a while, of course. After all, it took movies and TV content more than a decade to move fully into online channels.

The Narrower Focus

Allaire said that in contrast to some early initiatives like Diem that are designed change the monetary system entirely, Circle’s approach has been relatively narrow and includes working with regulators.

He said the thinking is: “Let’s start by focusing on payment system innovations for dollar transactions.” When (and if) the Diem system does indeed launch, that might do much to spur interest across the financial services industry.

What About Regulators?

As for the regulatory landscape, Allaire said it’s important to make a distinction between the “agency side” such as the U.S. Office of the Comptroller of Currency (OCC) vs. congressional committees that are seeking to try different legislative approaches.

He said agencies such as the OCC and FinCEN are focused on addressing risks and paving a path toward people actually owning and using cryptocurrencies. Allaire said that generally speaking, various regulatory approaches will for now mimic the way the banking system works today rather than improve the banking system.

What’s Next?

Looking ahead, Allaire believes that more consumer-facing companies will embrace digital currencies as financial institutions continue to delve into or broaden their stablecoin efforts.

“There’s a tremendous opportunity to use blockchains and identity infrastructure to significantly improve and simultaneously provide incredible accountability to law enforcement and preserve privacy,” he said. “[But] there are some open questions there, and I think those will be the big issues walking into the new year.”