Coinbase Adds to Its Revenue Streams by Acquiring a Strategic Stake in USDC

Coinbase, a major cryptocurrency exchange, has acquired a stake in Circle Internet Financial, the issuer of USD Coin (USDC), the second-largest stablecoin. This move also results in the dissolution of the Centre Consortium, which previously oversaw USDC.

In a notable development within the cryptocurrency industry, Coinbase, a leading global cryptocurrency exchange, has acquired a minority share in Circle Internet Financial, which is the issuer of USD Coin (USDC), the second-largest stablecoin by market capitalization. This acquisition carries significant implications, as it leads to the dissolution of Centre Consortium, a body that previously governed the USDC stablecoin.

Meanwhile, Coinbase announced the delisting of Tether (USDT), DAI and RAI for their Canadian customers, citing regulatory uncertainty surrounding these stablecoins in the Canadian cryptocurrency market. Although regulatory uncertainty might have played a factor in this decision, members of the cryptocurrency community can’t help but wonder if this is a strategic move to increase the market share of USDC within the Canadian market. Adding credence to this speculation is the fact that Coinbase will continue its support for USDC for its Canadian customers.

Coinbase Takes Strategic Share in USDC

In a recent development, Coinbase, one of the world's largest cryptocurrency exchanges, has acquired a minority share in Circle Internet Financial, the issuer of the second-largest stablecoin by market cap, USD Coin (USDC). The acquisition has led to the dissolution of Centre Consortium, which previously governed the USDC stablecoin, and marks a significant shift in the landscape of stablecoins and the collaboration between these two influential cryptocurrency companies.

The dissolution of Centre Consortium comes as a strategic decision by Coinbase and Circle. The two companies have issued a joint statement outlining the changes and their implications. According to Circle CEO Jeremy Allaire and Coinbase CEO Brian Armstrong, Centre Consortium will cease to exist as a stand-alone entity, and Circle will continue to be the sole issuer of USDC. This consolidation of responsibilities underscores the commitment of both companies to streamline operations and enhance the governance of USDC.

The dissolution announcement also brought to light a noteworthy financial adjustment. Revenue generated from the interest earned on the dollar reserves backing USDC tokens will now be shared equally between Circle and Coinbase. This equal distribution signifies a step towards a more balanced partnership between the two cryptocurrency giants.

USDC, a stablecoin pegged to the U.S. dollar, has held its position as the second-largest stablecoin by market capitalization for a considerable time. At press time, USDC's market capitalization hovers around $26 billion, trailing behind Tether's USDT stablecoin, which boasts a market capitalization of approximately $82 billion. Stablecoins like USDC serve as essential bridges between the traditional financial system and the cryptocurrency ecosystem, providing users with a stable and reliable digital representation of fiat currency.

One of the intriguing aspects of stablecoins is their backing mechanism. Typically, stablecoins are backed by fiat reserves, often U.S. dollars, held in custody by the issuing entity. Circle, in this case, holds these dollar reserves to ensure that every USDC token in circulation can be redeemed for its equivalent in U.S. dollars. However, these reserves aren't solely composed of cash; they can also include assets like Treasury Bills. With the Federal Reserve's efforts to combat inflation through interest rate hikes, the dynamics of these reserves have come into sharper focus.

Coinbase's recent acquisition of a minority share in Circle adds a layer of complexity to its revenue structure. Previously, Coinbase's revenue composition has been closely tied to trading fees. However, with its participation in the Centre Consortium, Coinbase also derived significant revenue from the interest earned on USDC reserves. As the market experiences periods of heightened volatility, trading activity can fluctuate, impacting trading fee revenue. By strengthening its ties with Circle, Coinbase seeks to diversify its revenue sources and potentially mitigate the impact of market fluctuations.

The acquisition also ushers in changes for the future availability of USDC. The joint announcement revealed that USDC will soon be accessible on six additional blockchains by the end of October this year. While the specific networks were not disclosed, this expansion will bring the total number of networks supporting USDC to 15, demonstrating the commitment of both companies to promoting accessibility and usability of the stablecoin.

Early Indication of the USDC Strategy?

A development that took place prior to the acquisition announcement may have been an early indication of Coinbase’s USDC growth strategy, as the exchange platform announced its decision to suspend trading of three prominent stablecoins - Tether (USDT), RAI, and DAI. This move comes shortly after Coinbase's proclamation of its full-scale entry into the Canadian market, including facilitating trading of the world's largest stablecoin, Tether. The decision also highlights the intricacies of navigating compliance and regulatory standards in the dynamic cryptocurrency space.

Coinbase communicated this decision to its customers via email, stating that the suspended trading of the aforementioned stablecoins is due to their failure to meet Coinbase's listing standards based on recent reviews. However, the suspension is limited to trading; customers will retain access to RAI, DAI, and USDT wallets for deposit and withdrawal functionalities.

The trading suspension is scheduled to go into effect on 31 August 2023 at approximately 12 p.m. ET. Notably, the announcement resonates with a similar action undertaken by rival exchange, which halted Canadian USDT support earlier in response to directives from the Ontario Securities Commission (OSC).

The context of this decision lies in the Canadian Securities Administrators' (CSA) classification of stablecoins like Tether and other value-pegged assets as securities. The CSA asserted that cryptocurrency exchanges are prohibited from enabling Canadian clients to trade or gain exposure to cryptocurrency assets that are classified as securities or derivatives. This classification was underscored by the Ontario Securities Commission's specific instructions.

Coinbase's move, therefore, is seen as a response to these regulatory dynamics. While the company did not delve into specifics, its decision to remove Tether from its Canadian platform might be a response to regulatory pressures and to align with the evolving legal framework. Worth mentioning is that while Tether is being suspended, Coinbase will continue to make its own stablecoin, USD Coin (USDC), available to Canadian traders.

The stability of Tether has faced scrutiny over the years due to concerns about the full backing of its reserves. Despite its popularity, Tether has not undergone a comprehensive audit of its reserves, fueling skepticism among critics.

Coinbase's expansion into Canada comes at a time when the company is grappling with a lawsuit filed by the U.S. Securities and Exchange Commission (SEC) alleging unauthorized listing of securities. This lawsuit underscores the challenges of navigating regulatory nuances, even for established platforms.

While Coinbase seeks to adapt to the regulatory environment in Canada, the exit of Binance, the world's largest cryptocurrency exchange by trading volume, from the Canadian market earlier in the year due to regulatory constraints, underscores the complexity of global regulatory compliance in the industry. As the industry continues to mature, exchanges and platforms must navigate an ever-evolving regulatory landscape to provide safe and compliant services to their users.

Stablecoin Performance Overview

USDC’s market cap stood at around $25,985,832,599 at press time according to CoinMarketCap. Despite being the 6th largest cryptocurrency and the 2nd largest stablecoin in this regard, USDC’s market share has declined over the past few months.

Market cap for USDC (Source: CoinMarketCap)

The stablecoin’s market cap reached an all-time high (ATH) of $55.55 billion on 10 July 2022. Since then, however, the stablecoin’s valuation has gradually dropped. It had stabilized between $42 billion and $46 billion between November of last year and March 2023. Thereafter, USDC’s market cap plummeted below the $30 billion mark and continued to decrease to stand at its current level.

Meanwhile,the market cap of USDC’s biggest competitor, and the leading stablecoin, Tether (USDT) stood at more than $82 billion. Looking at the overall trading volume in the market over the past 24 hours, CoinMarketCap indicated that stablecoins accounted for $27.65 billion of the recorded volume during this time.

Most notably, USDT recorded $21,105,961,342 worth of trading volume. This suggests that the stablecoin is still the top pick for investors and traders. From a market cap perspective, USDT witnessed the complete opposite trend to that of USDC, as its market share rose during the past few months.

Market cap for USDT (Source: CoinMarketCap)

At press time, USDT’s market cap was only 17.40% down from its ATH of $83.51 billion, which was established in June of this year. It did drop to within $65 billion and $70 billion between Junne of 2022 and February 2023, but has since been in a positive trend to pursue a potential new ATH.