Ignore the villains. The United States is still the world’s leading economy and will remain so in the future. With a global pool of talent and world-class institutions, the United States has a competitive advantage in virtually every emerging technology. Web3 is no exception.
Despite its advantages, America is wasting its chance to dominate the digital economy. In what Messari CEO Ryan Selkis aptly calls a “colossal public policy failure,” the U.S. semi-official stablecoin, USD Coin (USDC), is losing out to former U.S. rival Tether (USDT). If policy makers don’t act soon, America could be left behind for good.
Obvious destiny in the metauniverse
Until recently, it seemed that USDC was about to become the de facto reserve currency of Web3. Regulated by the US Treasury and managed by Circle Internet Financial, USDC is a rare beacon of accountability in cryptocurrencies. It is also phenomenally fluid. USDC is convertible 1:1 to dollars, which Circle holds as cash or deposits in a transparent reserve managed by BlackRock.
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Users took notice. According to Circle, from its launch in 2018 to last year, the supply of USDC in circulation has grown exponentially, averaging 860% per year. By mid-2022, USDC’s market capitalization peaked at $55 billion. In the meantime, Circle began implementing a real Marshall Plan for Web3 infrastructure, including ramp rails and storage solutions. Currently, he implements institutional clients.
Importantly, Circle strongly emphasizes compliance with US laws, including US sanctions. For better or for worse, Circle may freeze USDC in blacklisted wallets at its sole discretion. According to Dune, it has so far frozen more than $8 million in more than 150 wallets. It is clear that the USDC is already a powerful tool for projecting America’s power down the chain, and this is only just beginning.
Last year, the USDC’s fortunes took a dramatic turn. Since its 2022 peak, market capitalization has nearly halved to around $30 billion. In a brief but troubling dip in March, USDC fell below $0.90 on some exchanges. Even more worryingly, USDC has started to lose ground to its former US rivals, especially Tether.
Certainly, USDC’s decline partly reflects outflows across the sector, and its decline, sparked by the collapse of Silicon Valley Bank, was the result of market panic, not weak fundamentals. However, the fact remains that as USDC’s market capitalization has been declining in recent months, Tether has grown by around $15 billion.
Now with over $80 billion in circulation, USDT’s dominance in the market is undisputed. It’s a win for Tether’s Hong Kong-based parent company, iFinex Inc, which also runs crypto exchange Bitfinex. However, this is a blow to US interests as well as Web3 as a whole.
From the perspective of an American policymaker, iFinex is Circle’s evil twin. While Circle’s fiat reserves are transparent, iFinex’s reserves are notoriously opaque; while Circle’s relationship with US regulators is friendly, iFinex’s relationship is strained; and while Circle is in line with American interests, iFinex is a mercenary.
It’s not too late for the USDC to regain its footing. In fact, even without active support from policy makers, the USDC is likely to thrive on its own merits. Oversight by the U.S. Department of the Treasury has made USDC the gold standard among stablecoins, and Circle’s infrastructure is sure to attract new users.
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That said, US officials should not leave the outcome to chance. Bipartisan crypto legislation may be elusive, but there are already plenty of political levers that could benefit the USDC at negligible cost. For starters, the Federal Reserve should give Circle the go-ahead for its reverse repo program, which would hedge USDC with a deep well of highly liquid, risk-free loans.
Similarly, the Securities and Exchange Commission should encourage the dissemination of compliant, USDC-denominated tokenized securities. In the meantime, regulators should support Circle’s infrastructure initiatives by providing clear guidance on issues such as on-chain “Know Your Customer”, anti-money laundering and financial reporting.
For too long, the US has treated Web3 as a regulatory problem rather than a strategic priority. In the battle for stablecoin supremacy, the stakes are too high to ignore. It’s time for the United States to pick sides.
Alex O’Donnell is the founder and CEO of Umami Labs and worked as an early contributor to Umami DAO. Prior to joining Umami Labs, he worked as a financial journalist at Reuters for seven years, where he covered mergers and acquisitions and initial public offerings.
This article is for information purposes only and is not intended to be and should not be construed as legal or investment advice. The views, thoughts and opinions expressed here are those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.