Cryptocurrency Explained: USD Coin
USD Coin (USDC) is a digital stablecoin that is pegged to the United States dollar. It was launched in September 2018 by CENTRE Consortium - a collaboration between the payments company Circle and the cryptocurrency exchange Coinbase.
USD Coin was created to tokenize the US dollar and make it easy to use online and on the blockchain. At any time, USDC tokens can be changed back to USD - and the value will always remain at a 1:1 ratio. The issuance and redemption of USDC tokens are executed with an ERC-20 smart contract on the Ethereum blockchain.
About CENTRE Consortium
CENTRE Consortium is a partnership between Circle and Coinbase. In this collaboration, Circle, known for being a crypto startup backed by the investment bank Goldman Sachs, developed the technology and governing framework behind USDC. With Circle, USDC is issued by regulated financial institutions and supported entirely by reserved assets.
Coinbase is a US-based online platform for buying, selling, transferring, and storing cryptocurrencies. Its role in the Centre Consortium is as the first commercial issuer of USDC.
To fully understand USD Coin, you must first understand what a stablecoin is.
What is a stablecoin?
A stablecoin is a type of cryptocurrency backed by a reserve asset like a government-issued currency or gold to offer price stability. Stablecoins have become popular because they provide the fast processing and privacy of cryptocurrencies while simultaneously offering the stability of fiat currencies like the US dollar, euro, or yuan. This price stability is accomplished through the collateralization, or backing, of the reserve asset.
The price of Bitcoin and other cryptocurrencies is ever-changing. Prices fluctuate, often drastically. For example, when Bitcoin breached $23,000 for the first time on December 17, 2020, the price fluctuated by 6.90% throughout the day. Bitcoin’s volatility doesn’t always work in its favor, though, because the price can also decrease at similar rates depending on the market.
The main objective of stablecoins is to solve this volatility problem by being a digital asset tied to another asset with a stable value - like the US dollar.
How does USD Coin Work?
Circle guarantees that a single US dollar backs each USD coin. The process of turning US dollars into USD Coins is called tokenization. The tokenization of US dollars happens in a three-step process:
A user sends US dollars to the coin issuer’s bank account.
The issuer uses a USD Coin smart contract to create the equivalent amount of USD Coin.
The newly minted USD Coins are sent to the user, and the substituted US dollars are held in reserve.
Redeeming USD Coins for US dollars is just as easy as minting the coins, but the above process happens in reverse. The creators of the USD Coin are required by regulation to provide full transparency with the financial institutions maintaining the US dollar reserves. Because of these regulations, USDC issuers are required to report their USDC holdings frequently.
Suppose you are interested in tokenizing your US dollars or redeeming USD Coins for dollars. In that case, you can do so by registering an account with Circle. When using Circle’s platform, there is no fee for tokenizing or redeeming. However, if you have an incorrect or rejected bank transfer, you will be charged $50. For Coinbase, all standard fees apply to USDC operations.
USD Coin in the news
Recently, Congress introduced the STABLE Act to ban any stablecoin that is not issued by a federal bank. The STABLE Act aims to treat stablecoin issuers as banks, requiring them to obtain a federal banking charter and abide by all current banking regulations. In early December, the Co-founder and CEO of Circle Jeremy Allaire took to Twitter to say that the STABLE Act would represent a huge step backward for digital currency innovation in the US.
Allaire wrote, “Forcing crypto, fintech and blockchain companies into the enormous regulatory burdens of Federal Reserve and FDIC regulation and supervision is inconsistent with the goals of supporting innovation in the fair and inclusive delivery of payments that comes from stablecoins.”
Also, at the beginning of December, Visa announced that it is integrating the USDC. The global payment network and credit card giant has announced plans to have select card issuers begin integrating USDC software into their platforms to enable users to ultimately send and receive USDC payments.
Today, there is more than $3.3 billion worth of USD Coin in circulation, making it the 12th largest cryptocurrency by market capitalization.
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