Circle hits at SEC stablecoin regulators

Founder and CEO Allaire claims the system is a regulator in and of itself

The U.S. Securities and Exchange Commission is not the right regulator for stablecoins, according to Jeremy Allaire, the chief executive and founder of Circle.

The Boston-based firm is the issuer of the second-largest stablecoin, USD Coin, with over $42 billion in circulation. Stablecoins usually aim to maintain a one-to-one ratio with key assets such as the dollar by holding comparable reserves, and act as a crucial medium between the traditional financial system and digital assets. The tokens are used to facilitate trades, exchange assets between blockchains and serve as a haven from the volatile price swings that hit cryptocurrencies, hence the stablecoin name.

“I don’t think the SEC is the regulator for stablecoins,” Allaire said in a Bloomberg interview. “There is a reason why everywhere in the world, including the U.S., the government is specifically saying payment stablecoins are a payment system and banking regulator activity.”

The main U.S. regulator for the securities industry has tightened rules over crypto firms from exchanges, custodians and stablecoins after a series of meltdowns in the industry last year, including the algorithmic stablecoin TerraUSD. Meanwhile, the New York State Department of Financial Services ordered Paxos earlier this month to stop minting Binance USD, the thirdlargest stablecoin, because of its relationship with exchange giant Binance. Tether is the largest stablecoin issuer.

SEC Chair Gary Gensler has turned up the spotlight on the stablecoin sector, even raising the specter that the tokens could be considered securities, making them subject to the agency’s registration and discloser requirements, as well as its oversight.

Circle noted recently that it hadn’t received a so-called Wells notice from the SEC in the wake of the Paxos clampdown. Paxos had acknowledged it received a Wells warning. The letter is typically sent by a securities regulator to companies that could face charges. Circle disclosed in July 2021 it had received a subpoena from the SEC which requested documents and information regarding its certain holdings, customer programs and operations.

“There are lots of flavors, as we like to say, not all stablecoins are created equal,” Allaire said. “But, clearly, from a policy perspective, the uniform view around the world is this is a payment system, prudential regulator space.”

Allaire says he’s generally in favor of a recent SEC proposal that includes virtual currencies in the assets that are subject to “qualified custodian” requirements. Under that plan, crypto firms would face annual evaluations, provide account statements and turn over records upon request. That would prevent crypto firms such as exchanges from commingling funds but make it more difficult for clients of hedge funds and private equity firms to hold digital assets.

“We think having qualified custodians that can provide the appropriate control structures and bankruptcy protections and the other things is a very important market structure and very valuable,” Allaire said. “We have seen a lot of lessons learned that random exchanges have your assets. There is a reason why you have that kind of rule.”

Bucking the crypto winter that has spurred wide-scale layoffs, Circle is expanding its headcount by as much as 25%. Rising interest rates have helped to boost returns from USDC’s reserves, including cash and short-duration Treasuries. Engineers and personnel at “outposts” across the world are among its hiring priorities, Allaire said.