Is USDC a safe investment?

The demand for and use of stablecoins has grown exponentially over the last few years, playing a critical role in savings, cross-border payments, remittances and corporate cash management. 

While a majority of crypto market participants use stablecoins for trading or generating yield, there are those who use stablecoins to save in dollars. This is particularly attractive in emerging market economies where dollar-banking is scarce, inflation is high or where there is poor or costly access to fiat transaction networks. 

But is it safe for anyone to invest in stablecoins?

Roughly 99% of all stablecoins reference the US Dollar, with two stablecoin projects emerging as the market leaders:

• Tether’s USDT: a centralized, real world asset collateralized stablecoin launched in October 2014, with a market cap of $132 billion (#3 overall). 
• Circle’s USDC: also centralized and backed by real world assets, USDC launched in September 2018 with a market cap at $38 billion. (#8 overall).

Stablecoins are tokenized representations of fiat currencies on the blockchain. As such, any factor—whether real or perceived—that undermines confidence or trust in this representation can significantly impact their stability.

In the study mentioned above, 50% of respondents cited using Tether over other stablecoins because they trusted it more. 

Yet, both Tether and USDC have lost their peg with the dollar on numerous occasions; one study showed that large cap stablecoins experienced over 609 depeg events in 2023. 

There are many factors that can destabilise stablecoins, but fluctuations in liquidity, concerns about reserves or wider market contagion remain some of the more common causes. Note also that depeg magnitude is important here. Any deviation above or below $1 is technically a depeg, but minor and temporary depegs of around 1-2% are relatively common. 

USDC is issued by a company, Circle, which takes several steps to ensure that their stablecoin maintains its 1:1 peg with the US Dollar as often as possible. The following list provides details of these steps:

1. Complying with regulators. Confidence and trust play a key role in an investor’s' decision to use a stablecoin. Further, it stands to reason that regulatory compliance affords greater confidence to stablecoin users, as close collaboration with regulators may reduce the likelihood of any activity that could jeopardise the security of the asset. In July 2024, Circle became the first global stablecoin issuer to achieve compliance with the European Union's Markets in Crypto-Assets (MiCA) regulatory framework. This compliance ensures that USDC is issued in the EU under stringent regulatory standards, enhancing trust and transparency in the European market. Circle is also registered with the U.S. Financial Crimes Enforcement Network (FinCEN) and complies with state money transmission laws, treating USDC as a form of stored value or prepaid access. This registration underscores Circle's commitment to adhering to U.S. financial regulations.
2. Reserves transparency.  Using an independent auditor (currently Deloitte, at press time), Circle generates monthly attestations that detail the full nature and status of its reserves. The reserves are made up of lower-risk assets, such as short-dated U.S. Treasury securities and bank deposits. To add further credibility, reserves are primarily held in the SEC-registered Circle Reserve Fund (CRF) at BlackRock. The value of assets held in reserve should match or exceed the number of USDC in circulation to guarantee 1:1 redepemptions. At the time of writing, there are $38.09 billion USDC in circulation and $38.28 billion of reserve assets. If there are not sufficient reserves to back tokens in circulation, then we can logically expect the market to adjust for this, and reprice the value of USDC in response. Also, simply knowing that a) each USDC is fully backed (or over-collateralized) by reserve assets and that b) each token can be redeemed at any time back into its fiat equivalent, may contribute to stability by offering holders peace of mind.
3. Responsible management of supply and demand. When an individual or entity wants to convert US Dollars into USDC, Circle takes receipt of the fiat and mints new USDC. Equally, when someone wants to redeem their USDC back to fiat, the holder returns their USDC back to Circle, who then removes them from circulation (burns the tokens) and credits the holder with the equivalent value in US dollars. By dynamically managing the circulating supply of USDC in line with supply and demand, this contributes to the stability of the peg. If Circle were to erroneously increase the supply beyond the value of the reserve assets, and the market caught onto this, the value of USDC could potentially dip below $1 in response.

Investing in USDC as opposed to withdrawing crypto into fiat currency comes with a range of advantages, many of which relate to accessibility, flexibility and utility:

• While there are significant counterparty risks for doing so, USDC can be deployed into various Defi platforms to generate yield. Some platforms claim to offer returns of up to 20% AER, however, it must be reiterated that deploying your USDC into such platforms carries considerable risk of losing all your capital.
• While USDC is not permissionless and immutable like Bitcoin (BTC), it harnesses the technological advantages of blockchains to allow for cheap and fast international payments. Therefore, if you decide to invest in USDC, and later want to transfer funds to a vendor or relative who’s happy to accept crypto, doing so is likely to involve much less friction than sending fiat. This is particularly useful to people who live in countries without reliable financial services to enable international payments or where local options attract high fees. 
• USDC is a very liquid stablecoin with wide adoption, meaning that it can be easily exchanged for other assets without incurring slippage, at a huge selection of trading platforms, including Kraken. 
• USDC is a fully-backed tokenized asset, issued by a company with regulatory oversight in the US and Europe. If you reside in a nation with high inflation or where corruption is rife, parking your capital into USDC may be an attractive alternative to your local fiat currency. 
• The US Dollar is the global reserve currency, accounting for approximately 60% of global foreign exchange reserves as of recent years. This consistent demand supports the dollar's strength compared to other fiat currencies. Looking at DXY, the index which compares the dollar to a basket of other major currencies, it’s clear that over the last decade the dollar has performed well. Therefore, it makes sense that many investors globally would want to store their capital in digital dollars.
• Stablecoins are overwhelmingly dollarized, dwarfing all other types of fiat-backed stablecoins. This helps to ensure that for the foreseeable future, holders of USDC should be able to swap into other dollarized stablecoins at any time. 

Investing in a crypto-based derivative of a fiat currency comes with some important drawbacks which should be taken into consideration before making an investment decision:

• Stablecoins are at the mercy of the blockchains they operate on, and all the inherent flaws therein. In February of 2024, a bug caused an outage on the Solana blockchain. This meant that no one could process any transactions on the network, preventing millions of users from accessing or transacting with their digital assets. Such an outage can have considerable consequences, especially when investors have capital locked up as collateral in decentralized lending platforms or in margined futures positions. Therefore, if you had your USDC on the Solana blockchain during the outage, you would not have been able to interact with it in any way. Investors have to carefully consider the track record of the chain they choose to interact with. 
• While Circle has evidently made a concerted effort to comply with regulators, in the United States, the regulatory framework for fiat-backed stablecoins is still evolving, and it's not clear what the future will look like. Regulators may decide to enforce new requirements on stablecoin issuers, though this remains to be seen. The introduction of the bill, The Clarity for Payment Stablecoins Act of 2023 (H. R. 4766) endeavours to regulate stablecoins depending on the status of the issuer, and may offer some clarity in the future.
• Fiat-backed stablecoins can lose their 1:1 peg, causing considerable panic to holders who witness the value of their coins depreciate over a short period. Such was the case when USDC dropped to 90 cents in March 2023, after it became apparent that $3.3 billion of the stablecoins reserves were stuck in the failing Silicon Valley Bank. Any investor in USDC has to accept that small depegs are likely and somewhat normal, and larger more concerning challenges to the peg can occur.  
• There are two ways to convert USDC: 1) Exchange it at a centralized or decentralized trading platform into other assets or 2) Submit a redemption request with Circle and have the fiat US Dollars deposited back into your bank account. However, to have a redemption processed, you need to complete KYC and have a bank account to deposit the funds into. Naturally, this prevents the unbanked or individuals residing in sanctioned nations from being able to redeem USDC back into US Dollars. Therefore, were USDC to depeg in a meaningful way, some investors would be at a significant disadvantage. This somewhat unlikely scenario is still worth considering. 

Unlike some other cryptocurrencies, USDC is not permissionless; your coins can be frozen by Circle in order to comply with regulators. While unlikely, if your assets were connected to illicit activity in any shape or form, you could lose access to them and all of the value therein, with little opportunity to intervene.

From the aforementioned study, a few clear things are clear:

• Stablecoins have grown significantly in terms of settlement volume and adoption in the last few years.
• Stablecoin usage in emerging market economies is likely to increase, judging by participants’ responses (72% expected to increase their use of stablecoins in the next year, reported in 2024).
• Of those that preferred Tether to other stablecoins, 58% preferred it because they trusted it more and 45% said it was because it has the longest track record. 
• Tether was generally rated more favourably than USDC. 

What is less clear is the degree to which USDC will remain widely adopted in future. 

At the time of writing, USDC has cemented itself as the second largest US Dollar pegged coin. However, Tether (USDT) currently has more than three times the market cap of USDC, and the longevity of any crypto asset is not guaranteed. 

Many large crypto institutions and projects with several billion dollars worth of value have come and gone. If Tether were to erode USDC’s market cap significantly, this may have a series of knock-on effects, impacting liquidity and general investor confidence. 

Further, as mentioned above, it remains unclear how stablecoins will be regulated globally, and the way in which they will be regulated is likely to be markedly different between nations, as is currently the case between states in North America.

It is conceivable that following new legislation, some investors in USDC may find that they are no longer able to easily exchange their USDC into other assets, or run into other unforeseen difficulties.

The answer to this question ultimately depends on the reader’s own research and preferences. For those wishing to deploy their capital into a stablecoin, USDC has several qualities that may make it an attractive option to some traders:

1. Circle is actively collaborating with regulators to ensure it stays on the right side of the law in the applicable jurisdictions. 
2. Circle publishes regular attestations of its reserves, overseen by a reputable third party, with a clear breakdown of the location and nature of the assets in reserve.
3. USDC is incredibly liquid, is available on multiple chains, can be easily bridged or exchanged and is widely used as collateral on DeFi platforms. 
4. Of all the stablecoins in existence, USDC is one of the most reputable. This is evidenced by its market cap (Circle’s Euro-backed stablecoin (EURC) is currently the largest of its kind), and the fact that it has been used extensively for over six years, settling over $12 trillion in blockchain transactions.

There are two primary ways to purchase USDC tokens.

The first option likely applies to most traders and involves simply swapping other crypto assets like Chainlink (LINK) or XRP (XRP) for USDC at a centralized or decentralized trading platform. 

By depositing your fiat or crypto into a centralized exchange that provides stablecoin markets (check in advance), it should then be relatively straightforward to complete the exchange and use your USDC as you see fit. 

If you are using a Web3 wallet, navigate to a decentralized platform that has sufficient liquidity for the trading pair you are interested in. Before completing any swap, check to ensure that you will not incur excessive slippage.

The second and potentially more onerous option is to go to Circle directly. Here, you will be required to complete KYC and provide documentation to get the account setup. Once everything has been approved, you can then wire your US Dollars into Circle, who will then mint the corresponding USDC, adding it to your account. The USDC can then be distributed as needed.

Stablecoins, and more precisely USDC, perform a number of important functions in and out of the crypto ecosystem.

Many use USDC simply to speculate, but for others it may be a lifeline—offering a cheaper and faster alternative to legacy payment rails or a liferaft for those storing capital in heavily debased currencies.

As with all investment decisions, investors must assess all the facts and their own current situation before deciding whether using USDC as an investment vehicle is the right decision or not.

Now that you have a better understanding of USDC, why not explore this and other stablecoin assets on Kraken?

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