The Battle of Stablecoin: Circle's Rise Road and the Competition of New Forces in Traditional Finance

Source: Silicon Valley 101

Organized & Editor: Daisy, ChainCatcher

Editor 's note:

This article is compiled from the audio interview between podcast hosts Hongjun and Liu Feng on Can Sun and Zheng Di. Hongjun is the manager of "Silicon Valley 101 ", Liu Feng is the manager of " Web3 101 ", BODL Ventures partner, and was formerly the editor-in-chief of Link News. Guest Can Sun is the co-founder and head of legal compliance of Backpack Exchange . He 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.

The interview took the Circle listing as the starting point and deeply explored the differences between USDC and Tether ( USDT ) in compliance path, profit model, and alliance structure, and extended to stablecoins' future regulatory trends, platform landscape changes, and strategic possibilities for integrating with AI and global settlement networks.

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

TL;DR :

• Circle became the first stablecoin issuer to be listed, and USDC is regarded as a representative of "digital dollar", and its soaring market value has attracted market attention.
• The stablecoin market is entering a white-hot, with compliant USDC competing with non-compliant USDT , and traditional financial and technology giants accelerating their entry.
• Coinbase is deeply bound to USDC , which has promoted its rapid expansion, but its profits are limited by the earnings sharing agreement for a long time.
• Tether dominated the market with a high-yield and high-risk model, while Circle adheres to a compliance and transparent route, with a significant gap in profitability.
• Regulatory proposals such as the "Genius Act" are expected to reshape the industry order and promote the legalization and institutionalization of stablecoins.
• Circle is building an on-chain global settlement network, combining AI payment scenarios to try to become a new infrastructure for digital finance.

Comparison of the system and profit model between USDC and Tether

Hongjun: The first question is, why is the Circle launch so popular this time? Can , what do you think?

Can Sun : The core value of USDC lies in its use as a settlement and payment tool for digital dollars. The traditional financial payment system has had almost no substantial changes in the past few decades. Bank transfers are limited by working hours, and the overall efficiency remains in the last century. By digitizing the US dollar, Circle has the ability to settle 24 hours a day worldwide , which is a fundamental upgrade to the entire financial system.

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

Zheng Di: Circle is too deeply bound to Coinbase , limiting its profitability. From a fundamental perspective, the valuation of US$ 7 billion of IPO is reasonable, but the market value has risen rapidly to US$ 25 billion, which more reflects the market's scarce expectations for compliant stablecoin targets.

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

Hongjun: 2 trillion means the total amount of the entire stablecoin market?

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

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

So, what aspects does USDC ’s “compliance” specifically reflect? It is understood that Circle disclosed a large amount of operating costs and compliance information in its IPO prospectus. Tether is regarded as one of the most profitable crypto companies at present.

Can Sun : The United States currently has no unified federally-level stablecoin regulatory laws, and lacks a complete framework similar to the EU MiCA . USDC 's "compliance" is mainly reflected in its operations under the supervision of states, especially the New York State Department of Financial Services ( NYDFS ), and must comply with regulations on reserve management and audit disclosure.

USDC announces its monthly reserve structure, all funds are allocated to government money market funds and short-term US bonds, custodian by large banks or independent trust institutions, and are audited. In contrast, although Tether has also begun to disclose reserves in recent years, its asset types are more complex and its transparency is relatively low.

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

Can Sun : This bill has not 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, bringing significant benefits to the industry, because after clear supervision, traditional financial institutions such as banks and funds will be able to participate legally.

The most critical clause stipulates that any stablecoin that wishes to circulate or serves US users in the United States must obtain US regulatory licenses or accept equivalent supervision recognized by the United States. Otherwise, the government can ban it from listing on U.S. exchanges and has 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 the US-led clearing system. Even if Tether holds a US dollar account overseas, the US government has the ability to cut off its US dollar flows as long as its clearing bank is located in the United States.

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

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

Liu Feng: Do you think Tether is capable of meeting relevant regulatory requirements? Is it possible to achieve legal and compliant operations in the United States?

Can Sun : The Tether team is capable and is indeed promoting compliance and transparency. However, it is still uncertain whether the US regulatory requirements can be met in the short term. Especially when regulatory standards are high, its reserve structure and corporate governance may take longer to adjust.

Liu Feng: This means that the competition in the future will be more fair. Tether has benefited from regulatory arbitrage in the past , while USDC has borne higher compliance costs. As the rules tend to be unified, Tether will have to catch up.

Can Sun : Yes, there is a widespread practice of "no supervision first, and then complying with regulations" in the crypto industry. Many projects are operating offshore early and then seek compliance after they grow. 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 gaps to survive.

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

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

They realized that the market lacked compliance stablecoins, so they cooperated with Coinbase to establish a joint venture company Center and jointly launched USDC . The two companies each hold 50% of the shares and are jointly responsible for the issuance and governance of USDC . The goal is to build a transparent, compliant and auditable stablecoin system.

Liu Feng: Circle's early business was relatively diversified, involving Bitcoin wallets, payment products, OTC transactions, and operated the Poloniex exchange. Since then, the company has gradually divested these businesses and eventually focused on USDC . Can this be seen as a "strategic All in "? How did you view this change at that time?

Can Sun : Yes, after 2019 , Circle gradually divested its businesses such as Bitcoin wallet, OTC transactions, Poloniex and other businesses, and instead focuses on USDC . At that time, the outside world had doubts about this strategy of "giving up everything". After all, Poloniex is still large and the OTC business also has stable institutional customers.

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

The company judges 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 marginal businesses.

Hongjun: According to Circle 's prospectus, although Coinbase has withdrawn from the ranks of shareholders of Center , it still retains 50% of USDC's interest income . What are the backgrounds behind this income distribution agreement? What do you think about this?

Can Sun : This share agreement was reached when USDC was established in the early stages. Coinbase provides USDC with key resources, 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 a specific growth KPI each year , it can renew and receive 50% of USDC interest income for a long time . At present, Coinbase has indeed achieved these goals.

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

Zheng Di: Coinbase essentially plays the role of "making money by lying down". It does not assume the legal and regulatory responsibilities of USDC issuance, but it has obtained a long-term profit distribution mechanism through its early binding and has almost become a "sustainable dividend platform". Although Circle's overall profit seems considerable, it shrank significantly after sharing the profit.

Can Sun : Yes, but from a strategic perspective, this binding relationship did help USDC quickly open up the market in the early stages. As a compliant exchange, Coinbase has promoted USDC to go online and integrated wallet support, establishing a solid initial ecosystem for it. Although this "score first and win" strategy was a reasonable choice at the time, it now also puts Circle in a relatively passive position in its earnings structure.

Liu Feng: This reminds me of another problem. In recent years, Binance has gradually reduced its support for USDC and instead promoted a stablecoin called USD1 . It is rumored that USD1 involves the Trump family and the Abu Dhabi fund. Can , how do you view this trend?

Can Sun : USD1 is issued by First Digital , headquartered in Hong Kong and registered in Abu Dhabi. Binance is closely related to it, mainly because the project provides the platform with greater bargaining space and profit sharing. In contrast, USDC is deeply bound to Coinbase , and Binance not only has to bear the cost of use, but also cannot obtain profits, so it gradually reduces 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: Currently, the stablecoin market can be roughly divided into five major camps:

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

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

The third is USD1 of the Binance system , which has obvious platform attributes and has a complex capital structure behind it.

The fourth is the camp of technology companies, including PYUSD issued by PayPal and USDB supported by Stripe , which relies 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 stablecoins, which are mainly used for inter-institutional B2B clearing.

Liu Feng: How do you think these stablecoin camps will evolve in the future? Will it eventually form a duopoly pattern, or will each occupy different markets?

Zheng Di: I think the stablecoin market may eventually form a pattern similar to the operating system, dominated by two to three companies. Just like Android and iOS , one is open but has a higher risk, and the other is closed but emphasizes compliance, and the two can coexist for a long time.

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

Hongjun: We just mentioned the difference in profit model between USDC and USDT . Can you explain in detail how stablecoin issuers achieve profitability? For example, after a user redeems 1 USDC, how does Circle earn income ?

Can Sun : The profit model of stablecoins is relatively simple. The user redeems 1 USDC and Circle receives a reserve of USD . This fund will be invested in high-liquid and low-risk assets such as U.S. Treasury bonds and money market funds, with the current annualized return of about 4% .

Since USDC holders do not enjoy interest, all income belongs to the issuer, forming a clear "interest spread" - a stable return on assets can be obtained without paying interest.

Liu Feng: If Circle currently manages about US$ 61 billion in USDC , calculated at an annualized income of 4% , it is equivalent to obtaining about US$ 2.4 billion in interest income per year?

Can Sun : This is the case in theory, but the actual income requires deduction of multiple costs, such as the share of the payment to Coinbase , operating expenses and audit fees. Even so, Circle remained profitable, especially during the interest rate rise cycle, with interest income increasing significantly.

Zheng Di: Tether 's profit model is relatively more radical. Although its reserves also include safe assets such as U.S. Treasury and cash, the disclosure shows that it also includes high-risk assets such as Bitcoin, gold and unlisted companies' equity, so the overall yield is significantly higher than Circle .

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

Circle 's development strategy and stablecoin alliance trend

Hongjun: It sounds like Tether is more like a hedge fund than a financial infrastructure provider?

Can Sun : That's true. Tether 's operation is closer to an asset management institution, relying on user reserves to allocate high-yield portfolios. Although the returns are considerable, the credit risk is also relatively high.

In contrast, Circle is closer to the banking model, emphasizing asset transparency, compliance and low-risk management, and does not participate in high-risk investments. Despite lower returns, it is more credible in regulators and financial systems.

Liu Feng: Will regulators allow Tether , a “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 realistic question. Tether 's market value is more than twice that of USDC , accounting for more than 60% of the stablecoin market. Once a liquidity crisis or a major default occurs, it may trigger a "Lehman moment" in the crypto financial system.

To this end, many DeFi protocols and trading platforms have begun to hedge risk, such as diversifying the use of multiple stablecoins, setting a cap on holding ratios, or adopting a stablecoin basket mechanism to reduce dependence on a single stablecoin.

Zheng Di: Although Tether has not defaulted, in the context of stricter supervision, it will either be forced to become transparent and accept supervision in the future, or continue to operate in the "gray area", and the latter's space will be increasingly limited.

Relatively speaking, if Circle can gradually enter the traditional financial system, such as establishing clearing cooperation with Visa , Stripe , banks and other institutions, it will be expected to expand its market share in the long term. However, this path is slower, has higher operating costs, and has relatively limited profit margins.

Hongjun: It can be said that this is a game of high returns and compliance and stable competition. Tether has fast profits and high returns, but is accompanied by great risks; while Circle's path is stable, legal and compliant, and is sustainable, but its revenue is relatively limited.

Can Sun : Yes. Tether 's success relies on the rapid expansion of first-mover advantage and early market gap periods; while Circle bets on regulatory trends and the long-term evolution of traditional financial institutions.

Liu Feng: How do you view 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 maintain its lead?

Zheng Di: It is difficult to make a clear judgment, depending on several key factors. First, the regulatory process, whether the United States can introduce a clear legal framework for stablecoins in the next two to three years; second, whether financial institutions prefer to cooperate with a large scale; and 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 aimed at institutional settlement and compliance scenarios, dominated by USDC or other new compliant stablecoins.

Can Sun : I agree with this judgment. Just like the current financial system is divided into banking systems and shadow banking systems, stablecoins may also move towards dual-track development in the future. However, in key countries and core financial scenarios, the market share of compliant stablecoins is expected to gradually increase.

The technological evolution of stablecoins and the implementation of

emerging scenarios

Hongjun: We have discussed the past and current situation of stablecoins. Finally, I would like to ask you to look forward to the future development direction. What application scenarios may USDC enter next? In addition to expanding market share, does Circle have a new strategic layout?

Can Sun : Circle 's current core strategy is to build a global settlement network. The company launched a protocol called CCTP ( Cross-Chain Transfer Protocol ), which supports USDC to seamlessly transfer between multiple blockchains and connect with the banking system. In essence, it is creating a US dollar clearing system on a chain.

Compared with the traditional US dollar clearing process, USDC has the advantages of real-time receipt, low cost and transparent traceability. If Circle can successfully connect national payment systems with USDC networks, it will be possible to establish its status 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 settlement, etc. These scenarios are very suitable for completion through stablecoins.

USDC has advantages such as on-chain transparency, programmability and fast settlement, and is suitable as the basic settlement asset of AI companies. In the future, AI systems may directly connect to the on-chain payment API to achieve full automation of capital flow, which will become an important new application scenario for stablecoins.

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

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

The future pattern of stablecoins and the winning rules

Hongjun: How do you view the trend of traditional banks issuing stablecoins? JPM Coin, like JP Morgan, has been launched, and Wells Fargo, Citi, etc. are also exploring similar projects. Will these banks become competitors to Circle ?

Can Sun : Most of the stablecoins issued by traditional banks run on private chains and are limited to clearing within banks or between specific major customers. They are closed systems and cannot access mainstream wallets or DeFi protocols.

In contrast, USDC is an open network that can be used by any individual or institution, and developers can also access it freely. This is like the difference between the Internet and the LAN - the bank's stablecoins are more like LANs and are only for internal use; while USDC is an open Internet, with stronger compatibility and scalability.

Zheng Di: However, the power of banks cannot be underestimated. They have a huge customer base, extensive outlet layout and compliance advantages. If regulation is 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 the status of "financial infrastructure" within the compliance framework. Once its stablecoins become the clearing layer of the mainstream financial system, they can form a strong network effect and first-mover advantage.

Liu Feng: How do you view the possible structural changes in the stablecoin industry in the next few years? Among the many participants such as Circle , Tether , traditional banks, and technology companies, who is more likely to stand out in the end?

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

From the current perspective, Circle is the only project that is likely to meet these three requirements at the same time. Tether has strong profitability, but has obvious shortcomings in compliance; stablecoins issued by banks have compliance advantages, but their technical structure 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 key to the ultimate competition is not the market value, but who can become the "liquidation foundation of the digital financial system." Just like today's SWIFT and VISA , the competition for stablecoins is competing with multi-dimensional capabilities such as settlement efficiency, credit level, regulatory ability and ecosystem construction.