Sitting solo on a San Francisco stage, Circle CEO Jeremy Allaire asked tennis superstar Serena Williams what it’s like to face “unrelenting skepticism.”
“What do you do when someone says you can’t do this?” Allaire asked the athlete turned VC, who was beaming into Circle’s Converge22 convention by video.
“Oh, I love it when someone tells me you can’t do this,” Williams, her face projected on a big screen, answered, to cheers in the hall. “Self-doubt is normal,” the managing partner of Serena Ventures added, but you have to “put that in a box.”
It was a fitting exchange to kick off the third day of Converge22, Circle’s first major industry event. The crypto confab is taking place at a time when the stablecoin powerhouse is wrestling with major pressures on multiple fronts, from the crypto market crash to heightened government scrutiny and, more recently, Binance’s controversial decision to change the way it handles USDC, Circle’s dollar-linked stablecoin.
Allaire discussed these challenges in an interview with Protocol during a convention break.
Perhaps the biggest hurdle is the growing regulatory concern about stablecoins in the wake of the luna-UST collapse a few months ago. Federal Reserve Chair Jay Powell warned this week that “if people are going to think something is money, then it needs to actually have the qualities of money.”
Allaire said there is an ongoing push for a clearer definition of “what’s called a payment stablecoin.” For a U.S. dollar digital currency to function as part of the U.S. financial system, he added, “It’s going to have to behave in certain ways, it’s going to have to be backed in certain ways, it’s going to have to be issued by registered and regulated financial institutions.”
Converge22 is taking place as Circle wrestles with major pressures, from the crypto market crash to heightened government scrutiny and Binance’s controversial decision to change the way it handles USDC, its dollar-linked stablecoin.Photo: Benjamin Pimentel/Protocol
The crash of the UST stablecoin turned regulators’ attention to the risks of so-called algorithmic stablecoins, which use automated systems to dynamically control the supply of tokens in order to maintain a price peg.
Other major stablecoins, such as USDC and tether, maintain monetary reserves to back their pegs. Allaire had predicted that, despite the UST crash, algorithm-based stablecoins are viewed as the “holy grail” in the industry, given many crypto supporters’ aversion to any dependence on fiat currency and their belief that software can help build a more efficient currency and financial ecosystem.
“The technology does allow for a lot of invention,” he told Protocol, adding that risk should always be a serious concern, given what happened.
“These are financial instruments, and financial instruments are regulated,” he said. “So the concept of ‘Hey, you’re gonna go create these high-risk financial instruments, and there’ll be no regulation’ is completely unrealistic.”
Powell had said the Fed is still studying proposals to create an official U.S. digital dollar, a process that he said could take “at least a couple of years.” Allaire said a priority should be to pass legislation defining payment stablecoins, which he said is “the fastest path to define a digital dollar that can be issued and operated on the internet.”
“[T]he concept of ‘Hey, you’re gonna go create these high-risk financial instruments, and there’ll be no regulation’ is completely unrealistic.”
“It already exists,” he said, referring to stablecoins like USDC. “There’s an opportunity to kind of codify that at the federal level, to make that a part of the supervisory framework of the Federal Reserve.”
But despite progress in the deliberations over stablecoins and other aspects of crypto, serious challenges remain on the regulatory front. One recent example is the Treasury Department’s decision to sanction Tornado Cash, a system running on open-source software used in crypto transactions. The transaction-obscuring tool is ostensibly intended to protect consumer privacy, given the traceability of crypto transactions from wallet to wallet, but federal authorities say it is also used for money laundering.
Allaire announced in a blog post that Circle would comply despite serious misgivings about the policy.
“We are a United States financial institution,” he told Protocol. “We are regulated at the federal level, under federal counter-terrorist financing [regulations] and other kinds of financial integrity laws. So we have to be compliant with those.”
Asked about crypto companies that opted to defy or simply ignore the OFAC rule, Allaire quipped, “I can’t comment on their legal bills or anything else.”
“It’s a complex issue,” he said. “The sanctioning of open-source protocols and software I think is very problematic. I’ve made that very clear. The whole world needs to kind of figure out the boundaries.”
Allaire has played a high-profile role in a major crypto industry initiative focused on know-your-customer rules, a major regulatory and law enforcement concern. Major crypto companies, including Circle and Coinbase, unveiled in February a new digital identity protocol called Verite, which would make it possible to verify a customer’s identity digitally without requiring personal information be disclosed.
Allaire touted the progress of the KYC system at the Circle convention, saying Verite enables safe, compliant, privacy-preserving ways of interacting on blockchain networks. “If I’m a giant online retailer, and someone shows up and wants to pay me, I can know, ‘OK, this is an individual that is legit,’” he said. “‘This isn’t money that came through laundered or whatever.’”
Meanwhile, Circle is also facing challenges in a crypto industry that is still struggling to recover from the crash but also becoming increasingly competitive.
Recently, Binance, the world’s biggest crypto exchange, changed the way it handled customers’ USDC deposits by converting them to the company’s own stablecoin, BUSD. Binance CEO Changpeng Zhao told Protocol that it was meant to improve liquidity for USDC users, noting that when customers “finish trading, and they want to withdraw, they can withdraw USDC and the other stablecoins.”
“The sanctioning of open-source protocols and software I think is very problematic … The whole world needs to figure out the boundaries.”
Allaire confirmed that Binance, which does not operate in the U.S., had let Circle know about the plan. He also acknowledged that the move means USDC “can be used to deposit and withdraw right into the most liquid dollar trading books on Binance, and that is a good thing.”
But he also said the move was “really problematic.”
“They unilaterally took customers’ funds and then moved them into something else,” he said. “I think market conduct regulators in the United States would have a real problem with behavior like that.”
The wobbly global economy is another challenge. Circle is benefitting in a way from rising interest rates, he said, since it can make more money on the reserves backing USDC. But it is clearly a time for caution, he added.
“It’s a complex environment,” Allaire said. “So every CEO and every board has to be a little bit cautious, because there’s a lot of uncertainty. And so you don’t want to, you know, go crazy.”