In mid-June, the Federal Reserve proposed new rules for stablecoins. The proposal calls for stablecoin issuers to verify customer identities before opening new accounts or redeeming tokens, effectively applying bank-style anti-money laundering standards to stablecoins.
At first glance, this seems like bad news for Circle (NYSE: CRCL), the issuer of the USD Coin (CRYPTO: USDC) stablecoin. However, those tighter restrictions could actually strengthen USD Coin and make Circle a more compelling investment.
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Why would tighter regulations help Circle?
Circle promotes USD Coin as a tightly regulated, US-centric stablecoin. It’s also firmly backed by U.S. dollars and Treasuries. Its main competitor, Tether (CRYPTO: USDT), is issued by Hong Kong-based iFinex and backed by an opaque mix of cash, commercial paper, and other assets. While Tether dominates the overseas market, USD Coin leads the U.S. market.
Circle’s regulatory compliance makes USD Coin a trustworthy alternative to U.S. dollars for retail and institutional investors. But in many overseas markets, where investors consider stablecoins a hedge against inflation and currency devaluation, Tether’s immunity from U.S. regulations — along with its higher global liquidity — makes it a better choice than USD Coin.
Therefore, the Fed’s proposed anti-money laundering rules for stablecoins will make it even harder for Tether to challenge USD Coin in the U.S. market. They’ll also widen USD Coin’s moat — which is already fortified with tight restrictions — against smaller stablecoins. Circle’s application for a U.S. bank charter was conditionally approved last December, and a clearer regulatory framework for stablecoins could support its evolution into a federally chartered bank.
Circle generates most of its profits from reserve interest income, or the interest it earns on the bank deposits and short-term Treasuries it holds to back USD Coin. To keep growing those reserves, it needs to issue more USD Coins. Therefore, if the market wants more USD Coins, Circle’s revenues and profits will continue to rise. Higher interest rates — which are now on the table after the Fed’s most recent comments — will amplify those gains.
