USDC mulls ‘reversible’ transactions; banks v crypto v Senate

Reversible transactions could be coming for USDC stablecoin users, and crypto operators are taking the fight over stablecoin ‘yield/rewards’ to the U.S. Senate.

Circle (NASDAQ: CRCL), issuer of the USDC stablecoin, made headlines last week when its president, Heath Tarbert, told the Financial Times that the company was “thinking through … whether or not there’s the possibility of reversibility of transactions” in cases involving fraud or to resolve disputes between parties to a transaction.

Tarbert acknowledged the move would be controversial, because “at the same time we want settlement finality. So there’s an inherent tension there between being able to transfer something immediately, but having it be irrevocable.”

Tarbert claimed software developers were having discussions “as to whether on certain blockchains for certain circumstances, provided all the parties agree, there could be some degree of reversibility for fraud.” When it was suggested that Circle was adopting practices already prevalent in traditional finance, Tarbert acknowledged that “there are some benefits of the current system that aren’t necessarily currently present” in the blockchain realm.

The proposal follows Circle’s announcement of a new “open Layer-1 blockchain,” Arc, that will debut later this year as an “enterprise foundation for stablecoin payments, FX and capital market applications.” Circle has said payments won’t be directly unwound on Arc, but an additional layer could serve as a platform for ‘counter-payments,’ basically credit card-like refunds, assuming both parties agree.

Reaction from blockchain purists to Circle’s plan for reversible transactions was swift and scornful, with some suggesting it was “offensive” for Circle to still be associating itself with the term’ blockchain.’ Other critics have noted Circle’s history of not freezing/seizing USDC that law enforcement authorities have identified as tied to crime and/or terrorism financing.

Circle’s controversial archrival Tether (issuer of the market-leading USDT stablecoin) had long resisted law enforcement ‘requests’ to freeze its stablecoins but turned over a new leaf as it sought to distance itself from its perceived status as a major facilitator of money laundering efforts. Tether has since frozen ~1.5 billion USDT, roughly 15x the amount of USDC that Circle has frozen, despite USDT’s market cap being less than ~2.5x that of USDC’s.

Regardless of how often Circle uses this top-down control over USDC, the fact that it can calls into question the purpose of its new ‘reversibility’ scheme, beyond Circle’s desire to gain traction with tradfi institutions before its rivals do so.

Circle CEO Jeremy Allaire tweeted an angry response to the criticism, taking shots at journalists who “don’t do any even remedial research into what they’re saying or writing about.” Allaire noted that Circle had been conducting “research into how to enable refunds” for some time now, including publicly announcing its Refund Protocol smart contract in April.

Tether’s long and winding road to USAT

Meanwhile, Tether continues to promote the imminent launch of its new U.S.-facing stablecoin USAT, although there’s still no concrete date for its arrival. The official USAT ‘X’ account published an AI-generated promo clip last Friday contrasting the costs/delays of using traditional international transfer mechanisms with the alleged ease of USAT, aka “the people’s dollar.”

It’s possible that more details regarding USAT’s launch timeline could be disclosed this Thursday, October 2, at the Token2049 conference in Singapore, where a main stage ‘USAT – Tether in America’ panel has been scheduled. Appearing onstage will be Tether CEO Paolo Ardoino, USAT CEO (and former White House crypto aide) Bo Hines, and Tether’s Head of Government Affairs Jesse Spiro.

Also appearing will be Nathan McCauley, CEO of digital asset custodian Anchorage Digital, which is serving as the legal issuer of USAT thanks to its federal banking charter. Technically speaking, USAT will be minted by Tether’s Hadron tokenization platform while Anchorage will assist with compliance, legal issues, and business development.

Last week, McAuley told Bloomberg that Anchorage and Tether began discussing their tie-up last year as Congress got serious about passing stablecoin legislation. (The GENIUS Act was signed into law by President Trump this summer.) McAuley said it became “pretty clear to many in Washington that in many ways, the whole point of GENIUS was to think about what to do with Tether.”

Anchorage’s primary focus is custodying digital assets on behalf of third parties, but it launched a turnkey stablecoin-launching platform as it became clear Congress was serious about passing a bill. Anchorage’s stablecoin team currently comprises about 20 people, but McAuley said the plan is to ‘more than double’ this figure over the next year or so.

Also appearing on the panel will be Brandon Lutnick, son of Howard Lutnick, the current U.S. Commerce Secretary. Howard is the former head of Wall Street financial services firm Cantor Fitzgerald (NASDAQ: ZCFITX), the reins of which Howard handed to Brandon when he joined the government.

Cantor will serve as custodian of the U.S. Treasury bills backing USAT, much as it (allegedly) does for the over $100 billion in T-bills (allegedly) backing USDT. (While Lutnick Sr. has vouched for the existence of Tether’s T-bills, Tether has never submitted its reserves to a formal audit.)

Cantor is also serving as an adviser to Tether regarding its recently revealed plans to sell up to 3% of the company to investors via a private placement that could raise up to $20 billion. Bloomberg, which initially broke this story, reported on September 26 that among the “several high-profile names who are in early talks” about investing in Tether are the Tokyo-based Softbank Group and Cathie Wood’s Ark Investment Management.

Ark previously acquired 4.5 million shares in Tether’s rival, Circle, and sold many of them for a healthy profit after Circle went public on the Nasdaq in June, and its stock (briefly) soared over $250. Circle closed Monday’s trading at $133.66, up 5.25% on the day.

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Does growing stablecoin market threaten incumbents?

Smaller gains by smaller players include $1.4 billion flowing into PYUSD, the stablecoin issued by payment platform PayPal (NASDAQ: PYPL). The influx boosted PYUSD’s cap to nearly $2.4 billion, good for seventh place on the dollar-denominated stable chart.

PYUSD is issued by Paxos, which also issues Pax Dollar (USDP) and is part of the consortium behind the Global Dollar Network (USDG). Austin Campbell, a former Paxos exec, recently told Fortune that while Tether and Circle currently rule the roost, “the stablecoin that will probably dominate the future has not been created yet. It’s my prediction.”

Campbell believes that the growing embrace of stablecoins by mainstream payment processors like Stripe, Visa (NASDAQ: V), and Mastercard (NASDAQ: MA)—the latter another USDG consortium member—could convince many crypto fence-sitters to more fully embrace stablecoin usage.

Predictions of how large and how fast the stablecoin market could grow vary widely, with U.S. Treasury Secretary Scott Bessent himself offering two estimates this summer that the stablecoin market cap could hit either $2 trillion or $3.7 trillion by decade’s end (and those two estimates were made within a week of each other).

More recently, Citi (NASDAQ: C) analysts revised their projections for a 2030 stablecoin market cap, ranging from $1.9 trillion at the low end to $4 trillion at the high end, each figure $300 billion higher than Citi’s previous estimates. Institutional adoption appears to be growing, and Citi claims the “transformation is unfolding at a remarkable pace.”

There’s no question that GENIUS has given the market a lift. Of the total $56.5 billion in stablecoin inflows over the past six months, all but $10.8 billion of that occurred in Q3 (while GENIUS was either in the home stretch of its Congressional run or already the law of the land).

But while some crypto bros believe this shift spells the end of traditional banking as we know it, Citi suggests that crypto won’t “burn down the existing system. Rather it is helping us reimagine it.”

Citi cautions that stablecoins “are not the answer to everything … for many, bank tokens—deposit tokens, tokenized deposits and similar—will be an easier integration … turnover of bank tokens could exceed stablecoins by 2030, even with a small shift of current traditional rails on chain.”

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Coinbase v banks

The ‘crypto v banks’ turf war has heated up in recent months, with banks seeking to close a ‘loophole’ that allows crypto operators to circumvent the GENIUS Act’s prohibition on stablecoin issuers offering ‘yield’ to customers. Banks accuse non-issuing crypto firms like the Coinbase (NASDAQ: COIN) digital asset exchange of holding customers’ stablecoins in exchange for ‘rewards’ that are ‘yield’ in everything but name.

The banks maintain that these stablecoin yield/reward offers will cause a tsunami of withdrawals by traditional banking customers, negatively impacting banks’ and credit unions’ ability to offer new loans.

This view is by no means limited to America: in July, Bank of England governor Andrew Bailey told The Times that he’d prefer to see banks dealing with tokenized deposits rather than having stablecoins take “money out of the banking system” and the “credit creation world.”

And it’s not just mature Western markets potentially facing this threat. A new Moody’s Ratings report claimed banks in emerging markets “may face deposit erosion if individuals shift savings from domestic bank deposits into stablecoins or crypto wallets.”

Coinbase’s Chief Policy Officer, Faryar Shirzad, recently issued a blog post attempting to push back on the banks’ argument. Claiming the “‘ deposit erosion’ panic is a myth,” Shirzad said the banks’ effort was “a coordinated campaign by the largest financial institutions to slow innovation and preserve the rents they earn from a payment system that hasn’t fundamentally changed in decades.”

In an accompanying tweet-thread, Shirzad cited Coinbase-funded studies that found “no statistically significant relationship between stablecoin adoption and deposit outflows from community banks.” Shirzad said the banks were more concerned with “[c]rushing consumer choice out of fear of competition.”

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Enter the advocates

The Senate is currently crafting its digital market asset structure legislation and may end up including language that would tweak GENIUS’s rules. The tweaks would satisfy not only the banks but also members of the House of Representatives, who supported their own stablecoin bill (STABLE Act) earlier this year before begrudgingly deferring to the Senate’s version.

Enter Coinbase’s astroturf advocacy group Stand with Crypto, which just debuted a new campaign urging No More Bailouts. The campaign warns crypto holders of the threat to their (perceived) rights under GENIUS “to earn rewards for embracing stablecoins and using them.”

“The Big Banks want to take away that right and are lobbying Congress to actually take money out of your pocket. Rather than embracing new technology, they want to lock you into the same, old system with no choice, high fees, and stressful delays. Their action isn’t pro-consumer, it’s anti-competitive plain and simple.”

The campaign urges U.S. crypto holders to contact their senator(s) and tell them to “stand up to the Big Banks and REJECT efforts to ban rewards.” Coinbase’s Chief Legal Officer, Paul Grewal, added his $0.02, tweeting that banks “want a bailout because competing with products that too often suck is, well, hard.”

Coinbase’s liberal use of the word ‘bailout’ here is ironic in the extreme, given that Circle’s USDC was bailed out by the U.S. Federal Deposit Insurance Corporation (FDIC) following the collapse of Silicon Valley Bank (SVB) in March 2023. Circle held $3.3 billion of its reserves at SVB, and the fear that Circle might not survive the loss of what was then ~10% of its reserves caused USDC to abruptly and dramatically lose its 1:1 peg with the dollar.

At the time, Coinbase was Circle’s joint venture partner on USDC, meaning Coinbase would have had to absorb much of that fiscal shortfall had the FDIC not stepped up—even though the FDIC was under no legal obligation to do so.

But Coinbase isn’t alone in going hard at the Senate. The Blockchain Association (which includes Coinbase among its 100+ members) has launched its own ‘Defend the GENIUS Act’ campaign that includes a letter sent to Senate and House committee leaders.

The letter insists that “GENIUS is settled law” and the banks’ messaging is “not just misleading” but “backwards.” The letter claims stablecoins “are not a threat to consumer or credit markets. They are a threat to incumbents and an outdated system.”

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