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Questions raised as Coinbase, Circle rejig USDC stablecoin relationship

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Coinbase (NASDAQ: COIN) and Circle are rejigging their stablecoin relationship and expanding USDC’s reach on additional blockchains.

On Monday, Circle announced that “growing regulatory clarity for stablecoins in the U.S. and around the world” meant there was little need for “a separate governance body” for the USDC stablecoin. As such, the Centre ‘consortium’—which only ever consisted of Coinbase and Circle—will “no longer exist as a stand-alone entity,” and Circle will bring USDC’s “governance and operations responsibilities in-house.”

Circle will now assume “direct accountability” for USDC, including sole responsibility for issuing new tokens, “holding all the smart contract keys, complying with regulations on governance of reserves, and enabling USDC on new blockchains.” But Coinbase isn’t being completely abandoned by the side of the road.

For one thing, Coinbase is taking an unquantified equity stake in Circle—whose CEO Jeremy Allaire told Fortune that Coinbase’s equity was a “small, minority” stake—that will create an “even greater strategic and economic alignment on the future of the financial system.”

If you read the above and tried to figure out what’s actually changed here besides the elimination of third-party paperwork, you’re not alone. Case in point: Circle and Coinbase will “continue to generate revenue from USDC reserves interest income” and will share this revenue “based on the amount of USDC held on each of our platforms.” The parties will also “equally share in interest income generated from the broader distribution and usage of USDC.”

USDC interest income has become crucial to Coinbase’s ability to remain a going concern, as transaction commission revenue remains broadly negative as customer enthusiasm for all things’ crypto’ wanes. Nonetheless, USDC interest revenue suffered a double-digit decline in Coinbase’s latest financial report as the stablecoin’s market cap continues to shrink.

USDC’s market cap dipped back under $26 billion this week, less than half its total from one year ago this time. Over the same period, the market cap of rival stablecoin USDT (Tether) has increased by a nearly equal amount to over $83 billion.

This fiscal coincidence has prompted theories about USDC serving as exit liquidity for USDT holders, as Tether and the exchanges on which it most prominently features (like Binance) are increasingly shut off from U.S. banking.

USDT is also traded on Coinbase, although for how much longer remains an open question. The U.S. Department of Justice (DOJ) is reportedly investigating Tether for (among other things) money laundering and bank fraud, and with Coinbase already in hot water with U.S. regulatory agencies, facilitating fraud—even indirectly—probably isn’t the wisest choice.

USDC is also facing more compliant competition on the home front via PYUSD, the new stablecoin from payment processor PayPal (NASDAQ: PYPL). While many observers are skeptical of the need or desire for yet another dollar-denominated token, everyone in this space appears to be positioning themselves for the inevitable moment when Tether’s legal luck runs out and its ‘reserves’ are exposed for the vaporware they’re largely assumed to be.

Throwing away the shares, er, the keys

To broaden USDC’s appeal, Circle simultaneously announced that the stablecoin would debut on six new blockchains, pushing its total chain count to 15. None of the new six were mentioned by name, although Circle previously tipped Cosmos, Near, Optimism, and Polkadot as future launch targets. All will reportedly make their debuts between September and October.

Presumably, Coinbase’s new Ethereum ‘layer 2′ network Base will be among the new USDC-friendly chains. Base launched this month with a bridged version of USDC (USDbC) in order for Base developers to have a ready stablecoin option.

Base has occasionally surpassed more veteran Ethereum layer 2’s in terms of daily transaction volume. Base reported over 670,000 transactions on August 13, then more than doubled that sum a week later. (That’s literally a drop in the bucket compared to some other chains. Just sayin’.)

Much of this activity came courtesy of the new ‘decentralized’ social network, which beta-launched on Base earlier this month. The ‘crypto’-focused effectively tokenizes its users, allowing the buying and selling of ‘shares’ in specific X (Twitter) accounts, with shares granting access to private chats with the user linked to those shares.

Part of the rush to join—by both humans and bots—is the vague promise of a token airdrop, but the project is already showing signs that it hadn’t quite thought this through. abruptly rebranded its ‘shares’ as ‘keys’ on Monday, claiming that ‘shares’ was only “a placeholder during development, and we think Keys better illustrates their purpose as in-app items used to unlock your friends’ chatrooms.”

Translation: someone outside our developer bubble reminded us that voluntarily triggering aspects of the Howey test for identifying securities that need to be registered with the U.S. Securities and Exchange Commission (SEC) is perhaps not the smartest choice in the current legal climate.

The folks behind are proving (albeit belatedly) smarter than those behind Coinbase, who continue to insist—despite all evidence to the contrary—that none of the tokens traded on its exchange are unregistered securities.

Anti-anti-money laundering

Coinbase has promised to ‘decentralize’ control over Base at some unspecified future date, in keeping with Base’s original pitch as “permissionless and open to anyone.” Coinbase’s head of protocols/Base lead Jesse Pollak reiterated that promise earlier this month to multiple outlets, saying because Base is “an open, permissionless ecosystem, you’re going to see people build all sorts of things.”

Quite possibly illegal things. Despite its relatively brief history, Base has proven popular with scammers. Last week, a Solidus report identified “more than 500 scam tokens” on Base, including BALD, a tongue-in-cheek tribute to Coinbase CEO Brian Armstrong’s shiny pate and which rugged over $5 million from Base users shortly after its launch.

Base launched with Coinbase as its only ‘sequencer,’ aka validator of on-chain transactions. The plan is to eventually enlist other sequencers to share this burden as part of the decentralization plan, but there’s no formal timetable for this shift.

In the interim, as Chris Blec noted back in February, if Coinbase permits users to bridge tokens from Ethereum without performing standard ‘know your customer’ and anti-money laundering checks, this would violate the terms of Coinbase’s state-level money transmitting licenses.

In March, Armstrong hinted that “centralized actors”—a status that Coinbase currently enjoys with Base—”are probably going to have the most responsibility there to avoid money laundering issues and having transaction monitoring programs.” But he never actually came out and offered any concrete guarantees that Coinbase would act in this capacity and appeared to be leaning heavily on the company’s vow to decentralize Base over time to avoid taking any action now.

Pollak may have given the game away when he told a crypto news outlet that “there’s no playbook” for what Coinbase is attempting with Base. But rest assured, “we’ve applied all of the Coinbase rigor to doing this over the last year, which includes working with literally every single part of the company, from legal to compliance, to finance to privacy, to regulatory, to ensure that … we’re doing this in the right way.”

Well, that’s alright then. Given Coinbase’s legendary ‘ready, fire, aim’ strategies and its watertight ‘these tokens go to 11’ logical arguments, what could possibly go wrong?

If Brian ain’t buyin’, why should anyone else?

Meanwhile, Coinbase’s efforts to buy back its sharply devalued long-term debt have hit a snag, as in nobody’s all that interested. Coinbase recently offered to buy up to $150 million of its 3.625% senior notes due in 2031 at a rate of 64.5¢ on the dollar. As of August 18, Coinbase had only managed to snatch up $50 million of these notes, and has been forced to up its offer to 67.5¢. Interested parties have until September 1 to accept Coinbase’s improved offer.

That billion-dollar debt was issued in September 2021, just a few months after Coinbase made its debut on the Nasdaq exchange. Coinbase investors were furious that the company waited until a week after its direct listing on the Nasdaq to reveal its need to raise this sum. It didn’t help that Coinbase insiders dumped $2.9 billion worth of their shares before that unpleasant reality was announced.

The fact that these insiders were aware that Coinbase’s financial cupboard was bare as early as December 2020 resulted in a shareholder suit accusing CEO Armstrong and other top execs of opting for a direct listing rather than the more traditional initial public offering because it spared them the requirement to lock up their shares for an extended period.

Armstrong has dumped a further $51.4 million of his shares post-listing, with this July’s sell-off accounting for nearly 30% of this total. In the past two years, Armstrong has engaged in 140 different Coinbase share sales but hasn’t made a single buy during this period. Coinbase share price currently hovers around $75, about one-fifth of its 2021 peak.

We’ll close with a quote from former SEC enforcement director John Reed Stark, who recently mused about Base’s ‘wild west’ approach: “Crypto is a horrendous and perilous hustle and, in my opinion, Coinbase is not only facilitating the grift, but also doing so at the expense of retail investors who desperately seek a winning lottery ticket and mistakenly believe that Coinbase will provide it. Fail not at your peril crypto fans, because my view is that Coinbase’s helping hand is not extended to ‘watch your six’ but to pick your pocket (ad infinitum).”

Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of groups—from BitMEX to BinanceBitcoin.comBlockstreamShapeShiftCoinbaseRipple,
EthereumFTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.

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