Coinbase, Leading US Crypto Exchange, Takes Stake in Circle, a Major Stablecoin Issuer

Coinbase Global Inc., the largest cryptocurrency exchange in the United States, has made a strategic investment in Circle, a prominent stablecoin issuer.

This move is attributed to the perceived increase in regulatory clarity surrounding stablecoins, both in the US and across the globe.

The collaborative history between Coinbase and Circle is marked by their co-founding of the Centre Consortium, responsible for overseeing the USD Coin stablecoin. With the dissolution of the Centre Consortium, specific terms of the agreement remain undisclosed.

In a blog post released on Monday, Boston-based Circle announced that the revenue generated by Coinbase and Circle from the USD Coin stablecoin would continue to be apportioned based on the quantity of USDC held on their respective platforms. Furthermore, a new arrangement entails an equal sharing of interest income stemming from the expanded distribution and use of USDC.

Stablecoins, cryptographic tokens pegged to tangible assets like the US dollar, are predominantly employed by traders for the seamless transfer of digital assets across various exchanges. While stablecoins have experienced limited penetration in consumer payments, recent developments indicate a shift in the regulatory landscape. A notable stride was taken as a crucial panel within the US House of Representatives advanced a bill aimed at regulating stablecoins, a proposal that currently rests within the House for further deliberation.

The impetus for enhanced regulatory transparency arises in the aftermath of decreased investor confidence in the cryptocurrency sector due to a series of industry-related scandals, which contributed to a significant market collapse. In this context, Circle’s disclosure in March regarding its exposure of $3.3 billion to the collapsed Silicon Valley Bank led to a brief detachment of USD Coin from its peg.

Amidst these challenges, the stablecoin market is witnessing escalating competition while grappling with an overall decrease in market valuation. The circulation of USD Coin has dwindled from an initial $45 billion to approximately $26 billion within the span of a year. In contrast, Tether, the most prominent stablecoin, has expanded its market presence during the same timeframe.

For Coinbase, the revenue-sharing mechanism with USD Coin has been a longstanding practice, with the stablecoin backed by a reserve of highly liquid assets such as cash and Treasuries. Given the prevailing high borrowing rates, the interest income derived from USDC has emerged as a noteworthy contributor to Coinbase’s financial performance.

In the second quarter, Coinbase recorded $151 million in revenue from USDC, as outlined in its shareholder letter. In response to this development, a Coinbase spokesperson confirmed that the company’s previously provided financial outlook remains unchanged, indicating minimal anticipated impact.