The Battle of Stablecoins: Circle's Rise Competes with New Forces Entering the Traditional Finance Arena

Source: Silicon Valley 101

Compiled & Compiled by: Daisy, ChainCatcher

Editor's note:

This article is compiled from an audio interview between podcast hosts Hong Jun and Liu Feng on Can Sun and Zheng Di. Hong Jun is the manager of "Silicon Valley 101", Liu Feng is the manager of "Web3 101", a partner of BODL Ventures, and was the editor-in-chief of Chain News. Guest Can Sun is the co-founder and head of legal compliance at Backpack Exchange and has been deeply involved in the design of USDC's legal structure. Zheng Di is a cutting-edge investor focusing on finance and crypto technology.

interview started with the Circle listing as a starting point and delved into the relationship between USDC and Tether (USDT). ) in compliance paths, profit models, and alliance structures, and extend to future regulatory trends for stablecoins, changes in the platform landscape, and strategic possibilities for combining with AI and global settlement networks.

The following is a compilation and compilation of the interview content.

TL; DR:

• Circle became the first stablecoin issuer to go public, USDC was seen as a "digital dollar" representative, and the skyrocketing market value attracted market attention.
• The stablecoin market has entered a white heat, with compliant USDC and non-compliant USDT competing with each other, and traditional financial and technology giants have accelerated their entry.
• Coinbase is deeply bound to USDC, which has promoted its rapid expansion, but its profits have long been limited by revenue-sharing agreements.
• Tether dominates the market with a high-yield, high-risk model, while Circle adheres to a compliance and transparency route, with significant profitability gaps.
• Regulatory proposals such as the Genius Act are expected to reshape the industry order and promote stablecoins towards legalization and institutionalization.
• Circle is building an on-chain global settlement network, combined with AI payment scenarios, trying to become a new infrastructure for digital finance.

Comparison of USDC and Tether system and profit model

Hongjun: The first question, why this timeIs Circle listed so sought after? Can, what do you think?

Can Sun: USDC's core value lies in its role as a digital dollar settlement and payment tool. The traditional financial payment system has undergone little substantive change over the past few decades, and bank transfers are limited by working hours, and the overall efficiency remains at the same level as in the last century. By digitizing the US dollar, Circle has the ability to settle in real-time 24 hours a day around the world, which is a fundamental upgrade to the entire financial system.

Another highlight of Circle's listing is that underwriters include traditional financial giants such as JP Morgan and Goldman Sachs, which are also exploring the issuance of stablecoins. If they include USDC in the existing clearing system in the future, USDC may become an "official" digital dollar. Therefore, Circle's listing not only represents the success of a technology company but also reflects the positive attitude of traditional finance towards the prospects of the digital dollar.

Zheng Di: Circle is too deeply tied to Coinbase, limiting its profitability. From a fundamental point of view, the $7 billion IPO valuation is still reasonable, but the market capitalization has risen rapidly to $25 billion, which reflects more of the market's scarcity expectations for compliant stablecoin targets.

The stablecoin market itself has great growth potential. There are two data worth paying attention to: First, the U.S. government and Standard Chartered and other institutions predict that the global stablecoin market will grow from the current $250 billion to $2 trillion by 2028; Second, more radical views such as Michael Saylor believe that the market size could reach $10 trillion in the long run. Under this growth expectation, investors are willing to give a higher valuation.

Hongjun: 2 trillion refers to the total volume of the entire stablecoin market?

Zheng Di: Currently, Circle's share of the stablecoin market is about 24% to 25%. If its market share remains unchanged and the overall market expands by 8 times, Circle's corresponding assets may grow to $480 billion or more.

Hongjun: Add some background information. USDT's issuer, Tether, is an offshore institution and is not regulated by the United States. USDC is issued by Circle, registered in the United States and regulated by various states, and is a compliant stablecoin. Up to now, the market value of global stablecoins is about $250 billion, of which USDT is about $150 billion, accounting for 62.5%; USDC is about $61 billion, accounting for about 24%.

So, what exactly is the "compliance" of USDC? It is understood that Circle disclosed a large amount of operating cost and compliance information in the IPO prospectus. Tether, on the other hand, is considered one of the most profitable crypto companies at the moment.

Can Sun: The United States currently does not have a unified federal stablecoin regulatory law and lacks a complete framework similar to the EU's MiCA. USDC's "compliance" is primarily reflected in its operation under the regulation of various states, particularly the New York State Department of Financial Services (NYDFS), which is subject to regulations regarding reserve management and audit disclosure.

USDC publishes its reserve structure every month, with funds allocated entirely to government money market funds and short-term U.S. Treasuries, held in custody by large banks or independent trusts, and audited. In contrast, although Tether has also begun to disclose reserves in recent years, its asset types are more complex and relatively less transparent.

Liu Feng: Regarding the "Genius Act", can you introduce the provisions that have the greatest impact on the industry? What impact could this legislation have on Tether and the stablecoin industry as a whole?

Can Sun: This bill has not yet been officially passed and is still under negotiation between the U.S. Senate and House of Representatives. Once implemented, it will become the first federal-level stablecoin regulatory framework, which will bring significant benefits to the industry, because after clear supervision, traditional financial institutions such as banks and funds will be able to legally participate.

The most critical clause stipulates that any stablecoin wishing to circulate or serve U.S. users must obtain a U.S. regulatory license or accept equivalent regulation recognized by the U.S. Otherwise, the government can ban it from listing on US exchanges and have the right to freeze its dollar reserves.

This clause has a particularly significant impact on Tether. Most of the world's dollar settlement relies on a U.S.-led clearing system, and even if Tether holds U.S. dollar accounts overseas, the U.S. government has the ability to cut off its dollar flows as long as its clearing bank is located in the United States.

Liu Feng: In other words, the United States can directly "get stuck" through the dollar system?

Can Sun: Yes. If Tether fails to meet U.S. regulatory requirements, the government can ask banks to stop custody of its U.S. dollar reserves. Once the reserves are frozen, USDT will lose its ability to peg 1:1 to the US dollar, which is a fatal blow to stablecoins. The United States has repeatedly used the financial system as a sanctions tool in history, and countries such as Iran and North Korea have been restricted by it.

Liu Feng: Do you think Tether has the ability to meet relevant regulatory requirements? Is it possible to operate legally and compliantly in the United States?

Can Sun: The Tether team has the capabilities to indeed promote compliance and transparency. However, it is still uncertain whether it will be able to meet U.S. regulatory requirements in the short term. Especially in the case of high regulatory standards, its reserve structure and corporate governance may take longer to adjust.

Liu Feng: This means that competition will be fairer in the future. In the past, Tether benefited from regulatory arbitrage, while USDC incurred higher compliance costs. As the rules become more uniform, Tether will have to catch up.

Can Sun: Yes, there is a common practice of "no regulation first, then compliance" in the crypto industry, with many projects operating offshore in the early stages and seeking compliance after growth. But once the United States implements strict regulations, institutions like Tether will be required to meet regulatory standards from the beginning and can no longer rely on regulatory vacancies to survive.

Hongjun: We have just analyzed the reasons why USDC has attracted attention, and then review the development path of Circle. The company was founded in 2013 and USDC was launched in 2018. Can, were you involved in the legal document for the joint launch of USDC by Circle and Coinbase at that time? In addition, why did Circle choose to enter the stablecoin track in the first place? How did you cooperate with Coinbase?

Can Sun: In 2018, the stablecoin market was almost monopolized by USDT, and asset transfers and loss compensation between exchanges were highly dependent on USDT However, due to its offshore operation and opaque information, there are greater risks. At that time, Circle was exploring diversification, with businesses such as Poloniex exchange, OTC trading and payment instruments, but these did not form a core breakthrough.

Realizing the lack of compliant stablecoins in the market, they partnered with Coinbase to establish a joint venture, Center, to jointly launch USDC. The two companies each hold 50% of the shares and are jointly responsible for the issuance and governance of USDC, with the goal of building a transparent, compliant, and auditable stablecoin system.

Liu Feng: Circle's early business was diversified, involving Bitcoin wallets, payment products, OTC trading, and operating the Poloniex exchange. Since then, the company has divested these businesses one after another, eventually focusing on USDC. Can this be seen as a kind of "strategic all-in"? How did you feel about this shift?

Can Sun: Yes, Circle gradually divested Bitcoin wallets, OTC transactions, and Poloniex and other businesses have turned to focus on USDC. At that time, there were doubts about this "give up everything" strategy, after all, Poloniex still has a scale and a stable number of institutional customers in the OTC business.

However, Circle predicts that compliant stablecoins have the potential to become an important part of the future financial infrastructure. Whoever can be the first to enter and establish ecological barriers may become the core bearer of the "digital dollar". USDC's transparency and compliance have earned it recognition from large institutions, payment companies, and even governments.

The company judged that this is a "winner-takes-all" track, and the strategic value of the stablecoin ecosystem is much higher than the short-term benefits of other edge businesses.

Hongjun: According to Circle's prospectus, Coinbase has withdrawn from the ranks of Center's shareholders, but it still retains50% of USDC interest income. What is the background behind this revenue distribution agreement? What do you think about this?

Can Sun: This sharing agreement was reached when USDC was established in the early days. Coinbase provides key resources for USDC, including user channels, wallet systems, and exchange listing support. In return, Circle signed an interest income sharing agreement with it.

The agreement stipulates that as long as Coinbase completes specific growth KPIs every year, it can renew and receive USDC interest income for a long time 50%。 For now, Coinbase has indeed achieved these goals.

This also means that although Circle bears the issuance, operation, and legal responsibilities, it can only retain half of the proceeds, and the other half needs to be distributed to Coinbase, limiting its profitability.

Zheng Di: Coinbase essentially plays the role of "lying down and earning". It does not assume legal and regulatory responsibilities for USDC issuance, but with its early binding, it has obtained a long-term profit sharing mechanism and has almost become a "perpetual dividend platform". While Circle's overall profit seems substantial, it has shrunk significantly after the split.

Can Sun: Yes, but from a strategic point of view, this bonding relationship did help USDC quickly open the market in the early days. As a compliant exchange, Coinbase promoted the launch of USDC and integrated wallet support, establishing a solid initial ecosystem for it. Although this "divide before win" strategy was a reasonable choice at the time, it now puts Circle in a relatively passive position in terms of income structure.

Liu Feng: This reminds me of another question. In recent years, Binance has gradually reduced its support for USDC in favor of promoting a stablecoin called USD1. USD1 is rumored to be behind the Trump family and the Abu Dhabi fund. Can, what do you think of this trend?

Can Sun: USD1 is issued by First Digital, headquartered in Hong Kong and registered in Abu Dhabi. Binance has a close relationship with it, mainly because the project provides the platform with greater bargaining space and revenue sharing. In contrast, USDC is deeply bound to Coinbase, and Binance not only needs to bear the cost of use, but also cannot obtain profit sharing, so it gradually reduces its support. This phenomenon reflects a trend in the stablecoin market: major platforms have begun to support their own or cooperative stablecoins, gradually forming different alliance camps.

Zheng Di: The current stablecoin market can be roughly divided into five camps:

the first is the USDT camp led by Tether, which has the largest market share and the widest application, but relatively weak compliance.

The second is the USDC camp, led by Circle, emphasizing compliance and transparency, and is deeply tied to Coinbase.

The third is Binance's USD1, which has obvious platform attributes and a complex capital structure behind it.

The fourth is the technology company camp, including PYUSD issued by PayPal and USDB supported by Stripe, relying on its own payment network to promote the implementation of stablecoins.

The fifth is the traditional banking camp, such as JPMorgan's JPM Coin and Citi's internal stablecoin, which are mainly used for B2B clearing between institutions.

Liu Feng: How do you think these stablecoin camps will evolve in the future? Will there be a duopoly pattern in the end, or will they each occupy different markets?

Zheng Di: I think the stablecoin market may eventually form an operating system-like pattern, dominated by two or three. Just like Android and iOS, one is open but risky, and the other is closed but emphasizes compliance, the two can coexist for a long time.

Tether will continue to serve non-compliant markets, DeFi, and high-risk transactions, while compliant stablecoins such as USDC will gradually enter mainstream financial systems such as payments, clearing, and banking.

Hongjun: We just mentioned the difference between USDC and USDT in terms of profit models. Can you explain specifically how stablecoin issuers are profitable? For example, after a user exchanges 1 USDC, how does Circle earn income?

Can Sun: The monetization model of stablecoins is relatively simple. Users exchange 1 USDC, and Circle will receive $1 in reserve. This money will be invested in highly liquid, low-risk assets such as U.S. Treasury bonds and money market funds, with a current annualized return of about 4%.

Since USDC holders do not enjoy interest, all proceeds go to the issuer, creating a clear "spread" - stable asset returns without paying interest.

Liu Feng: If Circle currently manages about $61 billion in USDC, it will earn 4% annualized Calculated, it is equivalent to about $2.4 billion in interest income per year?

Can Sun: Theoretically, this is the case, but the actual income needs to deduct a number of costs, such as shares paid to Coinbase, operating expenses, and audit fees. Even so, Circle has remained profitable, especially during the cycle of rising interest rates, with significant growth in interest income.

Zheng Di: Tether's profit model is relatively more aggressive. Although its reserves also include safe assets such as U.S. Treasuries and cash, disclosures also include high-risk assets such as Bitcoin, gold, and unlisted equity, so the overall yield is significantly higher than Circle's.

The market estimates that Tether's annual profit could exceed $6 billion, while Circle is less than half. This also gives Tether the ability to continue to pay large dividends, investments and acquisitions.

Circle's development strategy and stablecoin alliance trend

Hongjun: It sounds like Tether operates more like a hedge fund. Not a financial infrastructure provider?

Can Sun: That's true. Tether operates closer to an asset management institution, relying on user reserves for high-yield portfolio allocation, which has considerable returns but relatively high credit risk.

In contrast, Circle is closer to the banking model, emphasizing asset transparency, compliance, and low-risk management, without engaging in high-risk investments. Despite lower returns, it has more credibility with regulators and the financial system.

Liu Feng: Will regulators allow Tether's "high-yield, high-risk" model to exist for a long time? Especially in the event of a run, is it possible to have a systemic impact on the entire crypto financial system?

Can Sun This is a very real problem. Tether's market capitalization is more than twice that of USDC, accounting for more than 60% of the stablecoin market. In the event of a liquidity crisis or major default, it could trigger a "Lehman moment" for the crypto financial system.

To this end, many DeFi protocols and trading platforms have begun to engage in risk hedging, such as diversifying the use of multiple stablecoins, setting a cap on the proportion of holdings, or adopting a stablecoin basket mechanism to reduce reliance on a single stablecoin.

Zheng Di: Although Tether has not defaulted at present, in the context of stricter regulations, it will either be forced to move towards transparency and acceptance in the future, or continue to operate in the "gray area", and the latter space will become more and more limited.

Relatively speaking, if Circle can gradually break into the traditional financial system, such as establishing clearing cooperation with Visa, Stripe, banks and other institutions, It is expected to expand its market share in the long term. However, this path is slower, more expensive to operate, and relatively limited profit margins.

Hongjun: It can be said that this is a game of high returns and stable compliance. Tether is fast and profitable, but it comes with greater risks; Circle's path is stable, legal and compliant, and sustainable, but its revenue is relatively limited.

Can Sun: Yes. Tether's success relies on first-mover advantage and rapid expansion during early market gaps; Circle, on the other hand, is betting on regulatory trends and the long-term evolution of traditional financial systems.

Liu Feng: What do you think of the development of these two models in the next few years? Is it possible for Circle to gradually catch up with Tether, or will Tether continue to lead the way?

Zheng Di: It is difficult to make a clear judgment and depends on several key factors. The first is the regulatory process, whether the United States can introduce a clear legal framework for stablecoins in the next two to three years; secondly, whether financial institutions are more inclined to cooperate with compliance models; Finally, whether Tether can continue to maintain high returns and properly control risks.

I tend to believe that the stablecoin market will present a "dual-track" pattern in the future: one track serves high-risk DeFi and offshore platforms, mainly USDT; The other track is geared towards institutional settlement and compliance scenarios, dominated by USDC or other new compliant stablecoins.

Can Sun: I agree with that judgment. Just as the current financial system is divided into a banking system and a shadow banking system, stablecoins may also develop on a dual track in the future. However, in key countries and core financial scenarios, the market share of compliant stablecoins is expected to gradually increase.

Technological Evolution and Emerging Scenarios of Stablecoins

Hongjun: We have discussed the past and current status of stablecoins, and finally I would like to ask you to look forward to the future development direction. What use cases may USDC enter next? In addition to expanding its market share, does Circle have any new strategic layouts?

Can Sun: Circle's current core strategy is to build a global settlement network. The company has launched a protocol called CCTP (Cross-Chain Transfer Protocol), which supports the seamless transfer of USDC between multiple blockchains and docking with the banking system. Essentially, it is creating an on-chain USD clearing system.

Compared with the traditional USD clearing process, USDC has the advantages of real-time arrival, low cost, and transparent traceability. If Circle can successfully connect national payment systems with the USDC network, it will be possible to establish its position as a global clearing standard.

Zheng Di: Another important direction is the integration of AI and stablecoins. More and more AI companies are building automated payment systems for payroll, contract execution, cost accounting, and cross-border settlements, which are ideal for stablecoins.

USDC has the advantages of on-chain transparency, programmability, and fast settlement, making it suitable as a basic settlement asset for AI enterprises. In the future, AI systems may directly connect to on-chain payment APIs to fully automate capital flows, which will become an important new application scenario for stablecoins.

Liu Feng: It can be said that AI is becoming an "amplifier" of stablecoins. An AI system that operates around the clock, combined with a payment network that settles around the clock, will greatly improve the efficiency and automation of capital flows.

Can Sun: Yes. Circle has partnered with some AI automation companies to develop prototype products with functions such as automated invoicing, bookkeeping, contract execution, and USDC settlement. Once these tools mature, the application of stablecoins will no longer be limited to the field of crypto transactions, but will gradually be integrated into mainstream business scenarios such as corporate financial systems, SaaS platforms, and financial software.

future pattern of stablecoins and the winning rule

Hongjun: What do you think of the trend of traditional banks issuing stablecoins? Like JPMorgan's JPM Coin, Wells Fargo, Citi, etc. are also exploring similar projects. Will these banks become competitors to Circle?

Can Sun: Most stablecoins issued by traditional banks run on private chains, limited to clearing within banks or between specific large customers, and are closed systems that cannot be accessed to mainstream wallets or DeFi protocols.

In contrast, USDC is an open network that can be used by any individual or institution, and developers can freely access it. It's like the difference between the internet and a LAN – a bank's stablecoin is more like a LAN and is only for internal use; USDC, on the other hand, is an open internet with stronger compatibility and scalability.

Zheng Di: However, the power of banks should not be underestimated. They have a large customer base, extensive outlet layout, and compliance benefits. If regulations are relaxed in the future, banks have the ability to quickly promote their own stablecoins.

The key to Circle is to be the first to establish a "financial infrastructure" within the compliance framework. Once its stablecoins become the liquidation layer of the mainstream financial system, it can form a strong network effect and first-mover advantage.

Liu Feng: What do you think about the structural changes that may occur in the stablecoin industry in the next few years? Among the multiple players such as Circle, Tether, traditional banks, technology companies, etc., who is more likely to come out on top in the end?

Zheng Di: In the next five to ten years, stablecoins will gradually evolve into financial infrastructure. Projects with real long-term development potential need to have three capabilities at the same time: one is to obtain regulatory recognition, the second is to implement it in actual payment scenarios, and the third is to have the ability to build a global clearing network.

As it stands, Circle is the only project that has the potential to meet all three requirements. Tether has strong profitability, but there are obvious shortcomings in compliance; Stablecoins issued by banks have compliance advantages, but the technical architecture is closed; Stablecoins launched by technology companies are supported by application scenarios, but users' trust in their financial attributes is still limited.

Can Sun: The ultimate competition is not about market capitalization, but about who can become the "liquidation foundation of the digital financial system". Just like SWIFT and VISA today, stablecoins compete for multi-dimensional capabilities such as settlement efficiency, credit level, supervisability, and ecosystem construction.