Most recent update: [February 18, 2022]
No securities regulatory authority has expressed an opinion about the Crypto Contracts or USD Coins, made available on the VirgoCX Platform, including an opinion that USD Coins is not itself a security and/or derivative.
What Is USD Coin?
USD Coin (USDC), also known as stablecoin. Stablecoins are cryptocurrencies with the purpose of providing price stability, typically through the use of a reserve asset. These coins are becoming increasingly more relevant as the world begins to move beyond a cashless ecosystem, and they attempt to conjoin the instant processing and privacy of cryptocurrency with the volatility-free environments of fiat currencies.
USDC is meant to be a coin that has a 1:1 ratio value with the United States dollar. “Minted” by the Centre consortium, USDC holds its value by having every coin in circulation backed by a real-world dollar in reserve, in a mix of cash and short-term US Treasury Bonds. USDC’s intended use case is to provide a platform for crypto traders in times of volatility as well as allowing businesses to accept payments in digital assets.
Circle and the CENTRE Consortium
On the heels of other stablecoins like Tether (USDT) and TrueUSD (TUSD), USDC was launched on September 26, 2018, in a collaboration between payments processing company Circle and cryptocurrency exchange Coinbase, collectively known as the CENTRE consortium.
Founded in 2013 by entrepreneurs Jimmy Allaire and Sean Neville, Boston-based Circle was a crypto start-up that originally focused on peer-to-peer payments processing. They received over US$135 million in venture capital between 2013 to 2016, with $50 million in funding from Goldman Sachs. Having such a large investment from one of the globe’s leading financial firms cemented Circle’s legitimacy in the cryptocurrency industry, as well as the potential for cryptocurrency as a whole. Originally, Circle facilitated cryptocurrency transactions on their exchange app, Circle Pay, the first exchange to be granted a BitLicense in the state of New York.
In 2018, through another round of venture capital funding, Circle was able to launch USDC to realize their goals of merging digital and fiat assets. The same year, Circle made a blockbuster acquisition, buying out cryptocurrency juggernaut Poloniex for US$400 million. Circle’s founders believed they could contribute to the global marketplace by making it efficient and inclusive, hoping to one day eliminate artificial economic borders.
In order to focus more on research and development as well as maintaining USDC, they sold the Circle trading platform to Voyager Digital in 2020.
How Does USDC Work?
As a stablecoin, USDC is intended to have a 1:1 valuation parallel to the US dollar. Stated directly from Coinbase, “Centre, the consortium that mints USDC, collectively holds US$1.00 for every single USDC. These funds are held in a special bank account that is constantly monitored and audited.”
Through tokenization, USDC is designed to be painless to use. When a user sends USD to the token issuer, a smart contract is created to generate an equivalent amount of USDC. The newly minted USDC is then delivered to the user, whilst the fiat USD are held in reserve. Once the user has received their USDC tokens, they are free to exchange it for other cryptocurrencies as they wish. When converting USDC back to USD, once the smart contract is completed, the fiat currency is wired to the bank account that the user signed up with.
A minimum redemption amount of 100 USDC is required, and it should be noted that tokens are processed on business days only, taking up to 24 hours. The tokenization process can take up to 2 business days.
The advantage to USDC, as with other stablecoins, is that it does not require a bank account. Users can send US dollar equivalents to anywhere around the globe in a cheap and efficient manner.
Technology and Security
Originally, USDC utilized the Ethereum platform, with USDC being represented as ERC20 tokens using smart contracts. USDC has since expanded to include the Algorand, Solana, and Stellar blockchains as well, along with the Hedera Hashgraph system. One of the major advantages of utilizing a smart contracts platform is that it can be integrated into a plethora of blockchain-based applications.
Coinbase touts USDC as being a “programmable dollar”. Some applications could include being able to create accounts that store money with a single line of code, lending money in a way that is cheap and transparent, as well as being able to create transparent and stable donations to charity.
Because USDC primarily runs on the Ethereum blockchain, it shares the same level of security as Ether. Like other stablecoins, as USDC is dependent on the state of the US dollar, it is largely protected from the fluctuations of the cryptocurrency market.
As of July 2021, there are around 27 billion USDC tokens in circulation. It is difficult to quantify the exact amount because, in theory, the amount of USDC that can exist is limitless. The currency is created whenever a user exchanges their USD for USDC. The number of coins in circulation is dependent on demand, and because it is meant to act as an equivalent to the US dollar, there is no such thing as block rewards or mining USDC.
In November 2020, for example, Circle announced that it was working with the US government to provide aid to Venezuelan health care workers. The US Treasury sent money to the government of the acting Venezuelan president, Juan Guaido, who then used the money to mint USDC. The USDC was then sent to Airtm, another crypto exchange, which then sent aid to their healthcare workers in the form of their own stablecoin, AirUSD.
In a major development, Visa announced in March 2021 that it would allow the use of Ethereum-based USDC to settle transactions on its payment network. Thanks to a partnership with Anchorage, another digital asset platform, exchanges made on Crypto.com no longer need USDC tokens to be exchanged to USD to settle transactions.
Drawbacks and Risks
One of the main criticisms of USDC, along with other stablecoins, is that having a digital asset tied to a fiat currency is against the idea of decentralization that cryptocurrency is built on. The creators of the USDC project also have the control to freeze funds and blacklist addresses on the suspicion that the coins are being used for illicit activities. While this bodes well for the integrity of the industry, some have noted that it is, again, a step away from complete decentralization.
Although Centre has been transparent in their custodian services, USDC – like many other stablecoins – is not technically legal tender that is insured by the US government, despite being tied to the actual price of the US dollar. And, like other stablecoins, it is difficult to algorithimically maintain a perfect 1:1 peg, especially during events that involve drastic changes in the market.
Lastly, as USDC is an ERC20 token, it is beholden to all of the other risks that Ethereum-based protocols run, such as inflated gas fees and/or cyber threats.
Prior to listing USD Coin on the VirgoCX Platform, VirgoCX performed due diligence on USD Coin and determined that USD Coin is unlikely to be a security or derivative under Canadian securities legislation. VirgoCX’s analysis including reviewing publicly available information on the following:
- The creation, governance, and location of USD Coin and/or its primary development team;
- The supply, demand, maturity and liquidity of USD Coin; and
- Legal and regulatory risks associated with USD Coin.
Statutory Rights under Securities Legislation
VirgoCX is offering Crypto Contracts on crypto assets in reliance on a prospectus exemption contained in the exemptive relief decision Re VirgoCX Inc. dated May 30, 2022 (the Decision). Please be aware that the statutory rights in section 130.1 of the Securities Act (Ontario), and, if applicable, similar statutory rights under the securities legislation of each other province and territory in Canada, do not apply in respect of the Crypto Fact Sheet to the extent a Crypto Contract is distributed under the prospectus relief in the Decision.
If you would like to learn more about USDC and how it works, check out these resources:
CENTRE Consortium’s website: https://www.centre.io/usdc
USDC on Coinbase: https://www.coinbase.com/usdc
USDC on CoinMarketCap: https://coinmarketcap.com/currencies/usd-coin/
USDC article on CryptoNews: https://cryptonews.com/coins/usd-coin/
USDC on Decrpt: https://decrypt.co/resources/what-is-us-dollar-coin-usdc