Credit Where Credit is Due
A quick note on a significant development in the Circle/USDC/stablecoin drama, which I’ve written about on several occasions. After 46 days, Circle finally released their May attestation report this morning. Once again, the company made important changes to their attestation language. Most critically, Circle finally released composition details of the reserves backing their stablecoin, USDC.
Let’s start with the language change. In the April attestation report, Circle described their reserves as follows [emphasis added]:
“US Dollars held in custody accounts are the total balances in accounts held by the Company at federally insured US depository institutions and in approved investments on behalf of the USDC holders at the Report Date.”
The words “approved investments” provoked many questions that the company seemed hesitant to answer. In the latest report, the language reads:
“Total fair value of US denominated assets is the total balances in segregated accounts held by the Company with US regulated financial institutions on behalf of the USDC holders at the Report Date. See the USDC Reserve Breakdown for details.”
From the words I’ve highlighted, one change is interesting and the other is critical. I think segregated is a much stronger word than custody, and words matter. Now on to the critical part. Gone is the vague reference to “approved investments.” In its place is a pretty thorough and transparent table which details the exact composition of those reserves, which I’ve reproduced below:
Look. I’m the first to admit that I’m a paranoid chicken. When a company that operates in an industry replete with frauds and scams obfuscates and deflects basic questions, it catches my attention. Having said that, one has to be prepared to change ones’ mind – even to do a 180-degree flip, if warranted.
In my opinion, by releasing this specific and comparatively comprehensive listing of their reserves while simultaneously seeking to go public via a SPAC transaction, Circle has addressed the most significant doubt about whether they are mostly on the up-and-up. If they weren’t, it would simply be too easy to prove at this point. In this market, mostly is better than most can claim.
Why did they wait so long to do this? Why does it take 40-50 days to produce these attestations? Why does the language keep changing? Why won’t they simply do a full audit instead of these attestations? These are legitimate questions that remain but, as of today, I believe they fall into the category of curiosities to be explained by management rather than smoke hiding some greater fire.
I applaud Jeremy Allaire, CEO of Circle, for this important step forward. Transparency is currency. He banked some currency today.
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61% of USDT backing is in cash and cash equivalents, but there's no breakdown of what are the cash equivalents, and how much. Circle defines its commercial paper only as 91 - 400 day maturing grade A1 commercial paper, which is a nice way of dodging what ended up hounding USDT in the press. Look guys, our "commercial paper" is grade A1, just ignore this other pile of commercial paper. It's as good as cash, trust us. Any commercial paper that matures within 90 days or less is a whole other magical class of asset with no associated risk.
At this rate, USDT could be backed 1% by cash, and 60% by short term revolving IOUs from Coinbase, and we'd never know the difference so long as Circle itself thinks Coinbase is good for it. This is what an audit would clear up, which is also why we're never going to get one.
I find myself to share the skeptical nature of the Doomberg Chicken and just can't help but wonder why 61% (similar to what Frank said) is "Cash & Cash Equivalents". Common Sense Thought: Given the nature of scrutiny over Stablecoins and their reserves -- if you had a substantial amount of cash OR high quality cash equivalents -- you would want to be AS EXPLICIT as possible. That would separate you and is the most common sense / logical thing to do.
Something tells me the Chicken will be back on this USDC Stablecoin in the near future.