What is USD Coin? USDC explained 

At Learn Crypto, we described stablecoins as recognised assets with a crypto twist in one of our earlier articles as they managed to efficiently bridge the gap between fiat currencies and the crypto environment. However, events like the collapse of the Terra ecosystem produced severe consequences for all stablecoins and stablecoin ecosystems. This isn’t to say that investors and regulators have given up on the notion of stablecoins – only now, there is more impetus to continue building on secure regulatory frameworks for them.  

USD coin (USDC) is a stablecoin pegged to the US dollar. It is managed by a consortium called Centre with several founding members including Circle and Coinbase. The Coinbase relation is why USDC is closely associated with the Coinbase exchange.

One of the more popular stablecoins using a fiat pegging mechanism, USD Coin or USD works as other stablecoins do, helping crypto users preserve the value of their digital assets while still enjoying the perks provided by blockchain technology.

A brief history of USD Coin 

Announced at the beginning of 2018, the USD coin was launched officially only a few months later in September. The Centre consortium was responsible for this. It was a partnership between USD Coin’s first commercial issuers, Circle and Coinbase, a regulated crypto exchange based in the United States. 

Because Coinbase was one of the earliest crypto exchanges – and, for many US investors, the only place you could easily buy Bitcoin in earlier times – many had become familiar with the Coinbase platform for buying, selling, transferring, and storing cryptocurrencies. The US-based publicly traded company’s other partner, Circle, was founded back in 2013 by two entrepreneurs as an official Money Transmitter, namely as a US-based money service business. It could help to think of such a company as an open financial book.

One important aspect in the story about the creation of the USD Coin is that US-based money service businesses in general are required to comply with the country’s federal laws and regulations. Therefore, before the coin could even be issued, an equivalent amount of US Dollars had to back up the official launch.

Therefore, all USD tokens at the time were, according to regulators, verifiable, backed-up, transparent, and compliant with existing regulations.

Centre maintains to this day that each token is backed by one US dollar or asset with equivalent value that is held in accounts of US-regulated financial institutions. This is an important trait when talking about stablecoins since it adds up to the much-needed financial security for investors.

How Does USD Coin Work?

As explained above, USD coin’s unique premise as a fiat-collateralised currency is that it is not printed out of thin air or without guarantees. The Circle company is responsible for backing up every USD coin with fiat money.

To maintain the coin’s stable value being equal to 1 US dollar, these coins are backed by real cash, with audits seemingly compliant with the requirements of the US government. 

Hence, when crypto investors decide to buy USD coins, they believe they are receiving strong guarantees that their investment is safe and regulated. Only when 1 USD Coin is bought is a new one minted. The whole system appears to serve as a parachute for investors since the coin provides liquidity and security in the crypto market.  

From a technical point of view, the USD coin is available as a financial asset on a number of major blockchain networks, such as Ethereum, Solana, Algorand, and others. At the same time, the coin is also an ERC-20 utility token or, in other words, a standard for creating smart contracts on the Ethereum network.

The entire process of turning US dollars into USD coins is referred to as tokenization. To explain the matter further, think of the tokenization of the USD coin as a three-step procedure. The first step refers to the user sending US dollars to the token issuer’s official bank account. The issuer receives the fiat currency and uses smart contracts to produce an equivalent value of crypto coins. The freshly minted USD coins are then delivered to the user and substituted fiat money is stored in reserves. To redeem coins for fiat money is a similar process, only undertaken in a reversed three-step procedure. 

Like all stablecoins, USDC enables users to trade without having to move the fiat currency from one exchange to another. Other advantages are linked to transparency, low price volatility, and financial security as being fully backed by US-regulated reserve assets.

Similar to other stablecoins, USDC can be transferred at any time with low transaction costs. It is faster, cheaper, and time-saving in comparison to procedures offered by traditional financial organisations.

On the other hand, no financial instrument is bulletproof and the USD coin, like any US dollar-pegged asset, is not immune to the US dollar price volatility and inflation. The strength of the US dollar in the second half of 2022, aided by historical spikes in central bank interest rate hikes, is recent evidence of this.

Is the USD Coin a Good Investment?

Being relatively stable digital assets, USD coins can be used in several manners due to their stable price-pegging, pricing in fiat money, and blockchain interconnection. When talking about investments, stablecoins are not a magical potion that is going to generate a bunch of money for investors and users on the crypto market. Think of investing in USD coins as stashing US dollars under your mattress since the investment will always be equivalent to the amount of invested fiat money. 

The possibility for investment may lie in generating passive income by lending coins to other investors by paying interest. Back to the main point, the significant aspect of fiat-collaterised currencies is the liquidity and stability they are bringing to the crypto table and helping businesses and individuals to transfer currencies in a faster and cost-efficient manner by eliminating the need for traditional financial middlemen.

Additionally, having close ties with the US government via regulatory compliance continues to produce mixed USDC opinions within the crypto community and a number of crypto experts who speculate that regulations could produce a crippling effect on the future of stablecoins.

The recent bank failures of Silicon Valley Bank in early March 2023, followed by the government takeover of Sovereign bank in the US, showcased just how vulnerable USD Coin was to ripples in the banking industry regulated in the US.

Silicon Valley Bank was the 16th largest bank in the country at the time, yet folded in a matter of two days when it was unable to pay back its customer deposits. The second-largest bank failure in US history was significant because the majority of its customers were in the fintech space -- counting Coinbase and USD Coin's Circle among them.

Just days after the news broke, Circle's announced that US regulators had taken control of deposits -- effectively preventing Circle from accessing the funds backing its USDC stablecoin. USDC promptly lost its $1 peg, falling as far as 86 cents before recovering four days later in mid-March to 99 cents.