A few days ago, Circle officially announced that it is transferring its USDC stablecoin reserves to a fund managed by BlackRock.
Indeed, thanks to a real partnership signed with BlackRock, the Circle Reserve Fund was created, which is the fund managed by BlackRock in which USDC reserves are kept.
BlackRock will manage Circle’s stablecoin (USDC) reserves
BlackRock is the largest investment company in the world. It was founded in 1988 and is headquartered in New York City. It manages AUM of as much as $10 trillion, and has revenues of nearly $20 billion with 18,400 employees.
So it is absolutely a true colossus, indeed one of the most important financial companies in the world.
In other words, it is one of the most solid financial companies in the world.
One of the co-founders is the famous Larry Fink, who at this time is both its chairman and CEO.
Circle and USDC
Circle, on the other hand, is the company that issues and manages the USDC stablecoin.
USDC is a multichain token, although it is mostly used on Ethereum, representing 1:1 the US dollar. In other words, for every single USDC token issued there exists in the reserves managed by Circle at least $1, so that 1 USDC is always convertible at par and at any time into $1.
It made its appearance on the crypto markets in 2018, so while it is not one of the “oldest” stablecoins, it is not among the youngest ones either.
Excluding the initial months, as of September 2019 its market value has always remained close to $1, with brief excursions to $0.98 or $1.01.
Much more interesting, however, is the trend in its market capitalization over time.
While 2019 closed with about half a billion USDC in circulation, by the end of 2020 it had become nearly 4 billion.
Thanks to the bull run in 2021 they rose to over 40 billion, and in 2022 they rose again.
In particular, following the collapse of the Terra ecosystem, and its stablecoin UST, many holders of stablecoins pegged to the dollar converted other stablecoins, such as USDT, into USDC, causing the latter’s capitalization to rise to 56 billion in mid-June. It is now back to 42 billion, which is in line with that at the end of 2021.
Circle chooses BlackRock for its USDC stablecoin
Circle’s partnership with BlackRock enabled the creation of the Circle Reserve Fund created specifically to entrust BlackRock with the management of USDC reserves.
As stated in the registration with the SEC, the objective of this fund is to seek current income consistent with liquidity and capital stability.
Circle Reserve Fund invests at least 99.5% of total assets in cash, US Treasury bills, and other bonds issued or guaranteed in terms of principal and interest by the US Treasury itself. The fund invests in securities with maturities of 397 days or less (with some exceptions) and the portfolio will have a dollar-weighted average maturity of 60 days or less, with a dollar-weighted average life of 120 days or less.
The securities purchased will be subject to the quality, diversification, and other requirements of Rule 2a-7 under the Investment Company Act of 1940, and therefore only securities with minimal credit risk, as determined by BlackRock, will be purchased.
Despite this, there is no denial that some minimum level of risk is there, just as with any other financial investment.
Indeed, the Circle Reserve Fund’s goal is to minimize risk, even if that risk is not completely zero, so as to assure USDC holders that they can always redeem them 1:1 in USD at any time.
The Fund is held in custody at the Bank of New York Mellon, which already serves as the custodian of USDC reserves.
Composition of reserves
Circle anticipates that the composition of reserves will continue to be about 20% cash and 80% short-dated US Treasury bonds at all times.
Algorithmic stablecoins such as UST, which failed in May, or DAI do not need direct dollar reserves. This makes them easier to issue, but also makes them riskier to hold.
To minimize risk, stablecoins must be fully backed by the underlying asset. That is, stablecoins pegged to the dollar minimize risk by retaining $1 for each token issued.
This is the case for USDC, but also for USDT and BUSD. However, not all stablecoins are cash.
The fact is that cash does not generate returns, while maintaining stablecoins still has costs. To be able to afford to pay these costs, managers of 100% supported stablecoins invest part of the reserves in securities or bonds that generate a minimum return.
Low-risk securities or bonds are selected, and these generate very limited returns, but enough to at least cover the management costs and generate a small income.
However, while this income in percentage terms is small, in absolute terms it can be significant. For example in the case of USDC, any annual income of half a percentage point would still correspond to $210 million, out of a total capital of $42 billion.
Therefore it is sufficient to risk even 20% of capital in this way, keeping 80% in non-interest-bearing cash.
The redemption of USDC
Stablecoins are effectively such only if it turns out to be always possible to redeem them at par with the underlying.
This is why managers of collateralized stablecoins keep a certain amount of cash on hand ready to be returned at any time to those who would request redemption of their tokens.
In the case of USDC Circle, they decided to keep 80% of the reserves in cash, so that they would be able to pay even large, substantial and rapid redemption requests.
For example, between 12 May and 7 July, 2022 Tether had to pay back as much as $18 billion out of its total market capitalization of $83 billion. It managed to do this without seemingly any problems precisely because it had sufficient cash to make the repayments quickly and in full.