tl;dr Summary: Circle, one of the firms behind USDC, has raised a $400M investment from BlackRock, Fidelity, Marshall Wace LLP and Fin Capital. The raise included a strategic partnership with BlackRock who looks to manage Circle’s over $50B in cash reserves and explore the application of USDC in traditional capital markets.
Why Stable Isn’t Boring
If you have hung around crypto for long enough, you have probably heard of the term stablecoin – a form of digital currency that attempts to peg its value to some external reference such as the United States Dollar. At its surface, it seems like a rather boring concept when compared to everything else going on in the space. But that couldn’t be farther from the truth.
USDC, which was founded by Circle and Coinbase back in May of 2018, is the fifth largest cryptocurrency by market cap and was expected to make Circle $40 million of revenue in 2021 alone. By the end of 2022, the revenue generated by USDC is expected to hit a whopping $111 million.
So, what is Circle? What is USDC? And why does their most recent $400 million dollar raise matter?
What is Circle?
While Circle is known for USDC, the vision and function Circle plays is much broader than just a stablecoin. In their words, Circle “[envisions] that [they can] build a global digital currency bank.” So, what does that entail?
You can think of their core business model in two parts:
1) Interest income from USDC reserves
2) The Transaction and Treasury Services associated with USDC
Thus, the value of USDC doesn’t come from the coin itself but rather from interest payments on their fiat currency reserves and transaction services associated with USDC. This model, while rather unassuming, is expected to generate hundreds of millions of dollars in revenue over the next few years and has captured the attention of numerous financial institutions.
Why Did They Raise More Money?
In their most recent round, which closed in April of 2022, Circle was able to get $400 million in funding along with a key strategic investment from asset management firm BlackRock. This raise comes at an interesting time for Circle. Not only is it less than a year after their previous funding, which raised $440 million, but it also arrived just a few months before their public market debut via SPAC merger. The jargon and details of the Circle SPAC merger warrants its own article, but for simplicity, you can think of it as another opportunity for Circle to raise substantial funds.
So, if Circle is already so flush with cash, why did they decide to take more?
To put it simply, BlackRock’s partnership is just that enticing.
From what is publicly available, we can see that BlackRock is promising two things from their partnership:
1) They will become a primary asset manager of USDC cash reserves
2) They will explore ways to apply USDC in traditional capital markets
Let’s break down what these two promises mean.
Money Doesn’t Just Sit
When you buy USDC from Coinbase or another platform, you are giving Circle fiat currency in exchange for their cryptocurrency. It is a deal for you because USDC allows you to take advantage of blockchain technology and services. But it is also a benefit for Circle because they get to utilize your fiat currency while you hold USDC.
Similar to a traditional bank, Circle thus far has taken the money users have given them and invested it into highly liquid investments. It might not seem like much but even a small percentage of USDC’s over $50 billion market cap is still millions in returns.
With BlackRock’s strategic partnership, however, Circle will now place some (if not all) of their cash reserves with BlackRock so they can invest it as they would like. This is an advantage for Circle as it reduces the work associated with managing their own reserves and puts BlackRock in the position of guaranteeing their 1-to-1 backing of USDC. This will likely result in lower costs for Circle and higher yields for over $50 billion in cash reserves.
But Wait, There’s More
Remember how we mentioned that the value of USDC isn’t just the coin, but the services associated with it? Well in 2021, it was expected to be over 50% more important than the revenue generated by USDC cash reserves. While cash reserves from USDC expected to generate $40 million in 2021, transaction and treasury services were expected to generate $65 million.
Whether it be bank transfers into USDC on an exchange or using Circle’s system for fiat currency payments on NBA Top Shot, Circle is constantly generating revenue from each of these services. Thus, the real value for Circle isn’t at the reserves level, but at the financial services level where they can be ubiquitous with all fiat currency to crypto transactions/exchanges.
BlackRock’s partnership here looks to unlock the world of capital markets to the crypto world through USDC. This means exploring ways to connect traditional securities opportunities like those traded on the New York Stock Exchange or NASDAQ to those of the crypto world.
While the partnership might seem somewhat ambiguous right now, the potential BlackRock has to expand and propel USDC further into the mainstream is unparalleled. Circle’s new partnership is likely to accelerate their plan to be a global digital currency bank and provide them the funds needed to execute on their plan. As Circle’s CEO said, “this funding round will drive the next evolution of Circle’s growth.”
As users, we should continue to watch these crypto and institutional partnerships as they become increasingly endemic into our web3 experience.