The US needs to promote USDC — before it’s too late

Ignore the doomsdayers. The United States is still the world’s leading economy and will remain so in the future. With its global talent pool and world-class institutions, America has a competitive advantage in virtually every emerging technology. Web3 is no exception.

Despite its advantages, the US is missing its chance to dominate the digital economy. In what Messari CEO Ryan Selkis appropriately called a “public policy failure”, America’s semi-official stablecoin, USD Coin (USDC), is losing ground to its former US rival, Tether (USDT). If policymakers don’t act quickly, America could be left behind forever.

Manifest Destiny in the Metaverse

Until recently, USDC seemed destined to become Web3’s de facto reserve currency. Regulated by the US Treasury and managed by Circle Internet Financial, USDC is a rare beacon of accountability in crypto. It is also exceptionally fluid. USDC is convertible 1:1 to the dollar, which Circle holds in cash or on deposit in a transparent reserve managed by BlackRock.

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Users have taken notice. According to Circle, the circulating supply of USDC has grown at an average rate of 860% per year since its launch in 2018 to last year. By mid-2022, the market cap of USDC is expected to grow to $55 billion. Meanwhile, Circle launched a veritable marshalling plan for Web3 infrastructure, including ramp rails and monitoring solutions. It is now onboarding institutional clients.

Importantly, Circle emphasizes US regulatory compliance, including US sanctions. For better or worse, Circle may freeze USDC in blacklisted wallets at its sole discretion. According to Dune, it has so far deposited over 8 million USDC in over 150 wallets. Clearly, USDC is already a powerful tool for projecting US power onto the chain, and it’s just getting started.

luck is changing

Over the past year, USDC’s fortunes have taken a drastic turn. Since the 2022 high, the market cap has nearly halved to around $30 billion. During a brief but troubling decline in March, the price of USDC fell below $0.90 on some exchanges. More worryingly, USDC has started to lose ground to its former US rivals, notably Tether.

To be sure, USDC’s decline partly reflected industry-wide outflows, and the decline was a product of market panic due to the collapse of Silicon Valley Bank, not poor fundamentals. However, the fact is that USDC’s market capitalization has declined in recent months, with Tether gaining about $15 billion.

Now, with over $80 billion in circulating supply, USDT’s market dominance is beyond question. It’s a win for Tether’s Hong Kong parent company iFinex Inc, which also operates the Bitfinex crypto exchange. However, it is a blow to US interests as well as to Web 3.

From the perspective of an American policymaker, iFinex is Circle’s evil twin brother. While Circle’s fiat reserves are transparent, iFinex’s are famously opaque; While Circle’s relationship with US regulators is cordial, iFinex’s is fraught; While Circle is in line with US interests, iFinex is a mercenary.

choose a side

It is not too late for USDC to find its footing. In fact, even without active support from policymakers, USDC has the potential to thrive on its own merits. Oversight by the US Treasury Department has made USDC the gold standard among stablecoins, and Circle’s infrastructure stack is sure to attract new users.

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That said, US officials should not leave the outcome to chance. Bipartisan crypto legislation may be elusive, but there are already plenty of policy levers that could favor USDC at negligible cost. For starters, the Federal Reserve Circle should give the green light to its reverse repo program, which would back USDC with a deep pool of highly liquid, risk-free loans.

Similarly, the Securities and Exchange Commission should encourage the proliferation of compliant, tokenized securities in USDC. In the meantime, regulators should support Circle’s infrastructure initiatives with clear guidance on issues such as on-chain Know Your Customer, anti-money laundering and financial reporting.

For too long the US has treated Web3 as a regulatory issue rather than a strategic priority. In the battle for stablecoin supremacy, the stakes are too high to ignore. It’s time for America to take sides.

Alex O’Donnell is the founder and CEO of Umami Labs and served as an early contributor to the Umami DAO. Prior to joining Umami Labs, he spent seven years at Reuters as a financial journalist covering M&A and IPOs.

This article is for general information purposes and is not intended and should not be construed as legal or investment advice. The views, opinions and opinions expressed here are solely those of the author and do not reflect or represent the views and opinions of Cointelegraph.

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