On Monday, Coinbase and Circle, the two companies behind USD Coin, settled on new terms that would change the governance and funding of USDC, including Coinbase taking an equity stake in Circle for the first time, and the two firms shuttering the Centre Consortium, which previously governed the stablecoin.
The updated agreement reflects the shifting economics and popularity of USDC, especially as it faces an uncertain global regulatory environment and competition from other stablecoins, including offshore rival Tether and the newly announced PayPal stablecoin. As part of the initiative, Circle plans to launch USDC on six new chains in the coming months to help increase adoption, although the company declined to provide specifics.
Launched in 2018, USDC is pegged to the U.S. dollar, meaning its price is fixed to $1 by corresponding reserves held in dollar-equivalent assets. While the idea for the project was first conceptualized by Circle, the company decided to create an independent consortium called Centre that would govern the token, with Coinbase joining as a distribution partner and helping launch USDC in October 2018.
As the popularity of decentralized finance applications grew, USDC’s market cap rose exponentially, from $500 million in late 2019 to almost $56 billion in July 2022. Corresponding hikes in interest rates created a cash windfall for both Coinbase and Circle, with the two companies collecting yields on the assets backing USDC, including U.S. Treasury bills. Interest income became a major lifeline for both firms during the bear market, with the category rising from $32.5 million for Coinbase in the second quarter of 2022 to $201.4 million in the second quarter of 2023.
Previously, Coinbase and Circle operated under a revenue-share agreement outlined in financial disclosure forms from both firms, with the split based on the amount of USDC distributed (or minted) by each company, as well as the amount of USDC held on each company’s platform. Under the new agreement, revenue will still be split based on the amount of USDC held on each platform, although interest income will now be equally shared from any off-platform USDC, such as in DeFi wallets, taking the focus away from which company minted it originally.
In an interview with Fortune, Circle CEO Jeremy Allaire said the new arrangement helps “tune up the economics in a way that felt really fair for both of us.”
He added that the equity stake creates a “good, strong alignment for long-term success.”
Both Allaire and Jim Migdal, a vice president for consumer business development at Coinbase, declined to provide specific figures for the equity investment, although Allaire described it as a “small, minority equity stake.”
The closing of Centre also represents a major change for USDC. In the initial white paper outlining Centre, the organization was conceived not only as a stablecoin distributor but a loftier steward for a vision of a global, interoperable payments network focused on consumers that would include a variety of fiat-backed tokens. To date, Centre has only launched USDC, with Circle also issuing a euro-backed stablecoin accessible on two blockchains. Instead, recent initiatives for USDC have targeted the crypto developer community, such as Circle’s launch of programmable wallets and cross-blockchain transfers, reflecting the predominance of DeFi.
While Centre described itself as a consortium, it only included Coinbase and Circle, as partnerships with other firms never materialized. The organization once had over 20 employees, although its staff dwindled to single digits in recent months. Under the new arrangement, governance for USDC will be shifted under Circle.
Allaire said that governance under a separate entity like Centre, which he described as a self-regulatory organization, was no longer necessary as governments around the world begin to adopt stablecoin legislation. While two key House of Representatives committees passed a stablecoin bill in late July, the effort stalled amid pressure from the White House.
For now, the challenge for Coinbase and Circle will be spurring USDC’s growth. In March, Circle revealed that $3.3 billion of the reserves backing USDC were trapped at failing Silicon Valley Bank. The stablecoin briefly lost its $1 peg on secondary markets. While it was able to recover after the federal government guaranteed Circle’s deposits, USDC’s market share has precipitously declined since, with much of the stablecoin market shifting to Tether. USDC’s market cap currently sits near $26 billion, with Tether’s close to $83 billion.
