Economics/Class Relations

The Financial Bubble Era Comes Full Circle

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An unstable encounter with a $50 billion stablecoin

Subscribers have noticed that it’s been quiet on this site for a while. This is because I spent much of the last month researching the #CryptoCrash, and the last week and a half engaged in an increasingly maddening search for a civilized and respectful way to write about one particular actor: Circle Internet Financial, makers of USDC, at $55 billion the second-biggest stablecoin in the world.

I’m giving up the hunt for “civilized and respectful.” That dog lived a long life, but it now must be taken out and shot. I’ve dealt with many frustrating institutions, from Bank of America to the press office of the FSB, but none produced such headaches. They’re the mother of all black boxes, and God help anyone invested in them.

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Trouble started with one question. On April 12, Circle announced it had raised $400 million with investments from BlackRock, Fidelity, Marshall Wace and Fin Capital, noting BlackRock and Circle had entered into a “broader strategic partnership” that would include “exploring capital market applications for USDC” that would “drive the next evolution of Circle’s growth.” This would involve the establishment of a new, BlackRock-managed, government money market fund, the Circle Reserve Fund, through which BlackRock would become “a primary asset manager of USDC cash reserves.”

Sources called with concerns. The fund’s registration statement says “shares are only available for purchase by Circle Internet Financial, LLC.” Not only is this unusual — one legal expert I spoke with said he’d “never seen such a fund… available for sale solely to a single entity” — but it raised a potentially troublesome issue for USDC holders. If Circle is to be the sole counterparty to a reserve fund, that would mean reserves would belong to the company, not its users. This could raise the same issue that recently dogged its partner, the digital exchange Coinbase, when it revealed in an SEC filing that “In the event of a bankruptcy, the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings and such customers could be treated as our general unsecured creditors.”

The firm insisted “your funds are safe with Coinbase,” but as noted in another story coming out today, the damage was done, and the news triggered market mayhem. Coinbase isn’t the same kind of company as Circle, but the issue of bankruptcy remoteness is relevant to both. It’s at the core of the whole dilemma of the cryptocurrency markets. Certainly the question of who actually owns and controls reserve assets exists, or seems to exist. Here Circle is unlike some competitors, whose user agreements specifically spell out that reserves are, say, “fully backed by US dollars held by Paxos Trust Company, LLC,” or “custodied pursuant to the Custody Agreement entered into by and between you and Gemini Trust Company, LLC.” Those describe trust agreements, which are truly bankruptcy remote.

Circle’s BlackRock fund suggested a different arrangement. Also, the new fund would be “permitted to invest up to one-third of its total assets in reverse repurchase agreements.” Would Circle be making use of that provision?

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