The first stock of stablecoins, Circle, continues to soar. Can investors still understand it?

From an investor's perspective, the current focus should be on cryptocurrency stocks. Once the macro environment becomes more accommodative in the future, attention can then shift to altcoins.

Author: Hazel & Ivy

[This article is lengthy, the table of contents is as follows]

Crazy Cryptocurrency Stocks

Circle's reasonable valuation and the information gap inside and outside the circle
Hong Kong stocks are also crazy: What stories did ZhongAn and LianLian tell?
The disadvantages of Hong Kong dollar stablecoins

The License Landscape of Payment Companies

Analyzing the Money Transmitter Service license
The hardest license to obtain: New York State BitLicense
The American power and money trading logic behind BitLicense

Circle and Coinbase, a tangled relationship

Why Coinbase takes 56% of the revenue
The two agreements between Circle and Coinbase and the possibility of separation

Insights into Coinbase's risks and opportunities

Where does Coinbase's 12% annualized deposit promotion come from?
The impact of cryptocurrency spot ETFs on Coinbase's business model
Acquiring Deribit opens a second curve

The "Genius Act" and the future of stablecoins

The development of stablecoins has become a bipartisan consensus, with disputes over how to prevent regulatory arbitrage
Tether's "hugging the thigh" and the $30 billion checkbook

The two-stage rocket of stablecoin development

Payment growth driven by traditional financial institutions
Transaction growth driven by everything on-chain
The next battlefield is in the B-end

Large tech companies and stablecoins

Can Meta issue its own stablecoin?
Web3 enters the era of "scene is king"

Wealth management stablecoins or tokenized market funds

After compliance, wealth management stablecoins may become niche
The alternative competition reflected by Circle's acquisition of Hashnote

The changes and constants of the old system

The potential business impact on Visa and Mastercard
Small and medium banks facing disintermediation risks
Stablecoin lending and on-chain banking

Circle founder Jeremy Allaire and the story with China
Circle's future capabilities and limitations

Can Circle tell a new story?
Offshore RMB stablecoins should not be absent
Imagination: Can Circle hug Meta's thigh?

What investment opportunities are left for ordinary people?

[Preface]

The original title of this post was "Circle, the first stock of stablecoins, has long-term worries and short-term concerns."

On the day this podcast was released, Circle had reached a market value of $30 billion, significantly exceeding its IPO issuance price. After the recording, guest Didier calculated for me that if Circle could maintain its current 24.35% market share by 2028, predicting a stablecoin scale of $2 trillion and an interest rate of 2%-3% three years later, deducting 50% of revenue sharing (slightly lower than the current 60% ratio), a market value of $30-40 billion could be calculated. However, this neutral to optimistic calculation is highly dependent on assumptions about market size, market share, interest rates, and promotional expenses.

I didn't expect that by the evening of June 16, when I was editing the full text for release, Circle had already surged to $35 billion, and I quietly changed the title of this post to: "Circle, the first stock of stablecoins, continues to soar. Can investors still understand it?"

Fundamentals and short-term trends are two different things. Respect the market, fear the market; this article does not constitute any investment advice.

[This Issue's Introduction]

Guest Zheng Di/Didier: A frontier technology investor, managing the knowledge community "Dots Institutional Investor Community."

Host Hazel Hu: Host of the podcast "No Words Unsaid," with over 6 years of experience as a financial media reporter, a core contributor to the Chinese public goods fund GCC, focusing on the practical application of cryptocurrency. Twitter/X: 0xHY2049; Jike: A nonchalant Yuyue.

1. Crazy Cryptocurrency Stocks

Hazel: Let's start with the stock prices that everyone is most concerned about. What does Didier think about Circle's performance in the first two days of trading?

Zheng Di: Regarding Circle's IPO pricing, I think the initial position was relatively reasonable, and there were indeed investment opportunities. However, I have always felt that Circle's model has many long-term concerns, so I don't quite understand why it could be speculated to $25 billion (Note: As of the time this manuscript was sent out, Circle had already surged to $35 billion). Some people even told me $80 billion, $100 billion, right? In fact, I haven't had much qualification to comment on this stock price in the past few days because I have been educated by this stock trading circle for several days, saying that this perspective should be long-term. But in reality, I feel there is a huge information gap and cognitive asymmetry between the inside and outside of the circle.

In the cryptocurrency field, we are all accustomed to using USDT and are well aware of Tether's actual strength. There is a view that although Tether and Circle are both engaged in stablecoin business, they are actually two different species.

This difference mainly stems from two key factors:

Compliance differences: Circle basically achieves 100% reserve compliance, while Tether is about 80% compliant with regulatory requirements, with the remaining 18% not complying with the "Genius Act." However, it is worth noting that Tether's main source of profit comes from this 18% non-compliant portion.
Scale of funds: Tether's current external investment and lending scale has reached $30 billion. Although it is often questioned about compliance issues, when a non-compliant company has already secured the support of the current Secretary of Commerce, and major players like SoftBank and Masayoshi Son are already on board, with a $30 billion checkbook available, can it not pave a compliant path? It definitely can. Having money and political resources is a hard truth. Therefore, in my view, Circle will face substantial challenges in achieving a valuation target of $25 billion or even higher.

Hazel: I personally feel that there are still too few quality assets in the Web2 field transitioning to Web3, so when a decent target appears, everyone starts to rush in.

Zheng Di: The meme frenzy and the success of Trump coins over the past year, while a huge personal achievement, may be a tragedy for the entire Web3 industry. It further reinforced the external label of this industry as a "casino" and siphoned off a lot of liquidity.

The altcoin season usually requires a loose liquidity environment, but the Federal Reserve has not yet cut interest rates. Market expectations have been adjusted from an optimistic five rate cuts at the beginning of the year to two (possibly as early as September). Former Dallas Fed President Rob Kaplan (now Vice Chairman of Goldman Sachs) predicted over a month ago that there would only be two rate cuts. Some large U.S. buy-side institutions even believe there will be no rate cuts for the entire year.

In this environment, Bitcoin remains strong, with its market cap share maintaining in the 60%-65% range. The liquidity in the altcoin market continues to be sluggish, with funds mainly concentrated in Bitcoin and a few leading projects. This also explains why Ethereum core teams like ConsenSys are pushing for Ethereum versions of "MicroStrategy" (like SBET). During the Dubai 2049 event, there was actually discussion about whether Ethereum could not short anymore and whether it needed to change the operator. I think this refers to ConsenSys getting involved with SBET. Because their initial fundraising of $400 million has already bought over $300 million, right? Then there is another $1 billion ATM; will they continue? Of course, it also depends on their fundraising ability and their premium, which is also very important, depending on their operational situation.

I have mentioned in my community, also relaying others' statements, that there are five main lines in the U.S. stock market: Web3, autonomous driving, robotics, nuclear power and fusion, and quantum computing. When liquidity is relatively good, grabbing these five main lines can basically make money. This year, we see that the wealth generated from cryptocurrency stocks is actually far higher than that of altcoins, so their elasticity is better than Bitcoin's. Therefore, what I have observed is that a large number of big players in the cryptocurrency circle, as well as mining bosses, are transferring a lot of funds to the cryptocurrency stock sector to trade these cryptocurrency stocks.

I wrote about a company called Canaan, which is a U.S. listed mining company associated with Bitmain, and its computing power has now reached 32EH. If the next 18EH is injected, it will quickly reach 50EH, entering the ranks of the top listed miners, and much of this is actually the infusion of miners' computing power. You will also see some miners hoping to monetize through stocks. For example, there is a company that does Solana hoarding strategies called DFDV; it actually started in DeFi but later shifted to Solana hoarding, and its stock price increased a hundredfold. There is also a company in Singapore that originally provided medical services but said it would hoard Bitcoin and has also seen significant price increases. So I think the stock market is indeed extremely hungry for Web3 assets right now.

A few days ago, a friend asked me to help analyze a question, sort of commissioning me to do a free "research project." He asked me why MetaPlanet and Hong Kong's Hong Kong Asia stocks, both advised by Jason from Solar Ventures, have such a large difference in stock performance?

I have also been pondering this question. One possible reason is that Hong Kong lacks local funds, and investors have more other targets to choose from, so they don't necessarily have to buy Hong Kong Asia. The Japanese market is relatively more closed, with a large amount of local funds, so when a concept like MetaPlanet, which is a "Japanese version of MicroStrategy," appears, the market is willing to pay. It may also be because the chip structure is better, more concentrated, and easier to be speculated by the market. Of course, I haven't done in-depth research yet; these are just some preliminary observations.

But this matter illustrates a phenomenon: the current popularity of "cryptocurrency stocks" is not limited to the U.S. stock market. We have seen MetaPlanet in the Japanese market, and in the Hong Kong stock market, we have also seen projects like Boya and Hong Kong Asia, although their increases may not be as dazzling as MetaPlanet's, they have also achieved several times of increase.

Hazel: It's not just companies that have bought cryptocurrencies; some payment company stocks in the Hong Kong stock market that have little to do with cryptocurrencies have also skyrocketed.

Zheng Di: That's right. You say you haven't explored related businesses, but the market thinks you have. You can't say you don't have it. If I say you have it, then you have it. For example, companies like ZhongAn, LianLian, and Yika have all exploded significantly, basically doubling in a week.

What story did ZhongAn tell? ZhongAn roughly said, "I have a 43% stake in ZhongAn Bank, and I am also one of the sandbox experiments for the Hong Kong stablecoin. I am an early shareholder of the stablecoin, holding a single-digit percentage, probably not exceeding 10%. First, my stablecoin asset will be valuable in the future. Second, if the stablecoin reaches a scale of HKD 500 billion, most of the funds will be deposited in my ZhongAn Bank, and I only need to pay 2% interest on deposits." This is the story they told, and as a result, it doubled in a week.

Why do I feel this story doesn't hold up? Because, first of all, the concept of crypto-friendly banks has already faded away. Initially, we knew why banks like Metropolitan Bank and Signature Bank (which was not publicly listed at the time), as well as Silvergate, were highly sought after in the U.S. stock market. Silvergate even became one of the rare ten-baggers among U.S. bank stocks, achieving a tenfold increase in about two to three years. Why? Because at that time, even giants like Coinbase had only three banks willing to do business with them in the U.S.; other banks refused to open accounts for them. Therefore, the fiat currency deposited by customers could only be held in Metropolitan Bank, Silvergate, and Signature Bank.

These three banks faced no competition; they simply accepted fiat deposits from Web3 companies and exchanges without paying interest—zero interest. They then used this zero-interest money to trade government bonds and MBS, earning a spread of over 2.5%. However, as more banks became willing to serve Web3 companies and exchanges, the era of zero-interest savings has long gone.

Of course, ZhongAn did not tell this story; they just mentioned 2%. But there are several issues here. First, we know that the main bank for the Web3 industry in Hong Kong should actually be Standard Chartered, not ZhongAn. ZhongAn is a virtual bank; while it is relatively friendly, it is still not a primary bank. We also know that Coinbase in Singapore chose Standard Chartered as its receiving bank. In short, Standard Chartered is more aggressive, has a better appetite, and is willing to take on this business, making it friendlier than other banks. Therefore, the main bank in Hong Kong is also Standard Chartered, and it is unlikely that all or most of the reserve deposits for the stablecoin would be held in ZhongAn Bank.

Additionally, we must understand that both U.S. legislation and the Hong Kong Securities and Futures Commission's consultation paper on stablecoins from last July prohibit stablecoin issuers from directly paying interest to users. We should consider why this is the case. The reason is likely that there is a fear of excessive competition; later competitors will certainly say, "I pay interest, and you don't, so I will promote my product." Such competition could weaken the financial capabilities of stablecoin issuers, making them more susceptible to failure, which could lead to serious social issues and negative impacts. Therefore, they prohibit direct interest payments to users. Of course, there are ways to circumvent this, such as using promotional fees, but on the surface, it is not allowed to pay interest directly.

We also need to consider a key issue: what is the biggest disadvantage of issuing a Hong Kong dollar stablecoin compared to a U.S. stablecoin? The interest rates are lower. Whether you buy CNH government bonds, panda bonds, or any other assets, your interest rates will be low. In the U.S., you can easily get 4% interest, which is a disadvantage.

Many people may not have noticed that the consultation paper from last July allowed the SFC to permit Hong Kong stablecoin issuers to mismatch their assets. This means that even if you issue a Hong Kong dollar stablecoin, you can actually buy, for example, CNH government bonds or panda bonds, which currently have an issuance scale of 300 billion. You could also buy U.S. government bonds to enjoy higher interest rates, but you must obtain special approval from the Hong Kong SFC. Additionally, you need to maintain excess reserves to hedge against currency mismatch and exchange rate risks. If you meet these two conditions, you can buy high-rated sovereign debt in other currencies, not just hold deposits in Hong Kong dollars.

Therefore, I believe there is a significant information gap between the stock market and those who have long studied stablecoins. This is why people are more willing to believe such narratives, leading to a doubling of stock prices in a week.

2. The License Landscape of Payment Companies

Zheng Di: LianLian and Yika both claim to have obtained the U.S. Money Transmitter Service license. In fact, in 2018, exchanges in the crypto space were very eager to obtain this Money Transmitter Service and other payment licenses in the U.S. We all know that these licenses are not particularly difficult to obtain. Especially the Money Service Provider (MSP) license, which is quite easy to get; it might cost around $1 million to acquire, though I don't know the current price, but that was the price at the time.

At that time, our feeling was that the Web3 industry seemed to be doing some futile work, which didn't really help the business. Now, how has it turned into a story for these stock companies and listed companies? The stock trading circle doesn't understand this; they think that this license must be hard to obtain. However, those of us deeply involved in the Web3 industry should know what is truly difficult to obtain: the New York State BitLicense. Of course, Circle also has this license; there are only 20 of them in the world, but you will find that the transaction volume in New York State is very, very low. The business that can be conducted with this license is quite limited. The New York State financial regulatory authority publishes this information every quarter.

But why do people still tirelessly pursue the New York State license? Because it is a symbol of strength, a form of endorsement. It allows me to present myself to all other states, including the federal government and other countries. For example, if I want to deal with Singapore's Monetary Authority of Singapore (MAS), the Hong Kong SFC, or the financial regulatory authorities in Dubai or Japan, I can say, "I have one of the 20 BitLicenses from New York State; your licenses are trivial compared to mine." Other countries' regulators will view the New York State regulatory threshold as the highest and strictest in the world, and since there are only 20 of them, they are hard to obtain. This will open doors for you with other countries' licenses and other states' licenses. This is why people are willing to obtain this license.

You can also see that the owner of the New York Stock Exchange (NYSE), which is now the Intercontinental Exchange, has a market value of about $200 million. After MicroStrategy stopped cooperating with it, its value plummeted, but why has it been rising recently? I think the market is still speculating whether someone will acquire it. What value does it have? Its business is quite limited; in the first quarter, its fee income was only $12 million, and that was before MicroStrategy stopped cooperating. So we can expect a significant drop in the second quarter. But its only valuable asset is that it has one of the 20 New York State licenses, so everyone is speculating whether someone might acquire it for those licenses.

Therefore, I believe that when we look at these payment institutions, whether they have U.S. payment licenses or Money Service Provider licenses, the stock market will use them to tell various narratives. The way the stock market talks now feels very similar to the ICO model of 2017: I tell a story, and everyone believes it, thinking this is impressive, that is impressive. But no one ever thinks about what is behind it.

However, in the current Web3 industry, I believe users have become very savvy; they don't believe anything you say. Unless you really come through with buybacks and dividends, even if you have cash flow, I still won't believe you. Only if you actually do buybacks and dividends will I believe you. This is also a manifestation of the lack of liquidity. In the stock market, I believe liquidity is still quite abundant; for various narratives and stories, it tends to believe first and then verify, believing first to make money, and later verifying who is left holding the bag. This is the current logic.

But I still want to say that when payment companies introduce stablecoin payments, like LianLian, I also wrote an analysis on LianLian. I haven't researched Yika yet, but LianLian's collaboration with BVNK, a U.K. stablecoin payment company, I believe will help it turn a profit in an optimistic scenario. In an optimistic case, I think it could increase profits by about $180 million; its current pre-tax loss is about $500 million, so it can still partially turn a profit, which is meaningful. This means it can increase the total payment amount by 0.2% to 0.3% as a profit increase, and this part can indeed bring some additional revenue through stablecoin payments. Therefore, I think there is some rationale for the market to speculate on Web2 payment companies.

Hazel: You just mentioned the New York State financial license; I actually remember that Circle was the first to obtain the BitLicense back in 2018, right? Because I had just started covering the industry, and I have a bit of an impression of that.

Zheng Di: Yes, this matter is particularly interesting and reflects the model of the combination of power and money in the United States. This is why I often say that you shouldn't look at USDT's non-compliance; they have already secured the support of the Secretary of Commerce, whose son was previously an intern at Tether and is now on board with Tether. I say that USDC hasn't really secured any significant backing. The power and money trading in the U.S. has actually been going on for a long time.

You can see when New York State had the idea to establish the BitLicense; it actually started in 2013. At that time, New York State held a hearing, right? They said that New York State was too strict, and they should loosen up; otherwise, the U.S. would lose its technological leadership in Web3, right? The idea of the BitLicense actually originated from that hearing in 2013.

The person who chaired that hearing was from the New York State regulatory authority, and he was the one who ultimately invented the BitLicense. But it is particularly amusing that after he invented this BitLicense system, he didn't issue the first license and then resigned; he left to start a consulting company. He provided consulting services for all applicants for the license. I suspect Circle might have hired him; I don't know, but I guess they did because he invented it. Who could be more suitable to be a consultant to guide you on how to obtain this license than the person who designed it? So he made quite a bit of money with his consulting company.

So you see, in the U.S., power and money trading has existed since ancient times; it has always been a commercial society, right? This is also why I say that the narrative in the stock market, which believes that USDT's non-compliance will lead to its downfall while USDC's compliance will allow it to capture market share, is not tenable.

3. Circle and Coinbase, a Tangled Relationship

Hazel: You just mentioned that the most obvious partner of USDC now is Coinbase. This is also one of the topics we will discuss next. In Circle's prospectus, it clearly states its relationship with Coinbase. This partnership significantly impacts Circle's net profit. Although its revenue is about $1.6 billion, after deducting various expenses, the net profit is only over $100 million.

Zheng Di: This agreement is actually quite unfavorable for Circle. The basic structure of the revenue-sharing agreement is as follows: Circle's entire income primarily comes from the interest on its reserves. These reserves can only be invested in U.S. government bonds maturing within 93 days, repurchase agreements maturing within 7 days, demand deposits in banks, and money market funds that invest in the aforementioned three types of assets.

But many people actually do not understand the details of the Genius Act and mistakenly believe that stablecoins can be invested in money market funds similar to those before the 2008 Lehman crisis. In reality, ordinary money market funds typically allocate to longer-term bonds, such as ten-year government bonds, and even assets like CDOs. When a run occurs, the mismatch between the duration of assets and liabilities can trigger a liquidity crisis. However, the Genius Act clearly stipulates that the money market funds in which the reserves are invested must only contain three types of short-term assets. As long as there is even a tiny amount of ten-year government bonds held, it cannot be considered compliant reserves.

Many traditional researchers may not have read the act carefully and analyze the risks of stablecoins based on experience and assumptions, which can easily lead to misjudgments. 85% of Circle's reserves are managed by BlackRock, which has established a Circle Reserve Fund that primarily invests in the aforementioned three types of short-term assets, with an average duration of only twelve days; the remaining 15% is held in demand accounts at banks. While this approach is conservative, it can yield an annualized return of over 4%.

Circle's entire revenue primarily comes from this interest income, rather than from charging user fees. The problem is that it does not return this interest to the token holders but pays it to promoters, such as Coinbase. This is essentially a disguised profit-sharing mechanism.

The revenue-sharing agreement between Circle and Coinbase has a "three-step" structure. Many people think Coinbase takes 50%, but that is not accurate. Circle actually allocates 60% of its revenue as promotional fees, of which about $900 million goes to Coinbase, and another $60.2 million goes to other platforms like Binance. In other words, out of Circle's $1.6 billion in revenue, after promotional fees, it is left with just over $600 million. Of that, over $500 million is for its own management and operational expenses, and after deducting taxes and other expenditures, the final net profit is only about $161 million.

Coinbase takes over 56% of Circle's revenue, but it only accounts for an average of 22% of USDC reserves on its platform. This revenue is far higher than its actual market share because the revenue-sharing mechanism is set up to be extremely favorable to it.

Specifically, the first step of this revenue-sharing agreement is to determine the "payment base," which is essentially equivalent to Circle's interest income. Circle will first take 0.1% to 1% from this to cover operational costs, and the remaining portion enters the "product revenue sharing" phase.

In this phase, Circle and Coinbase will share revenue based on the proportion of USDC held on their platforms daily. If Coinbase's platform holds 22% of USDC, it takes that portion of the revenue; if Circle's platform holds 6%, it takes 6%.

The second phase is the "ecosystem revenue sharing." For the remaining revenue, Coinbase takes 50%, and Circle takes the other half, and Circle may also need to continue paying other partners. Overall, Coinbase actually takes 56% of Circle's total revenue.

Why would Circle accept such an unfavorable agreement? The reason dates back to 2018. At that time, USDC was jointly launched by Circle and Coinbase, establishing a joint venture called Center Consortium, with both parties holding 50% equity.

However, by 2023, to facilitate Circle's independent IPO, it had to sever the equity binding with Coinbase. Thus, Circle repurchased 50% equity of Center from Coinbase using its 8.4 million shares, valued at over $200 million. This transaction was calculated at $25 per share, and its market value has since multiplied several times.

In exchange, Circle signed two cooperation agreements:

Main Cooperation Agreement: Signed in August 2023, lasting three years. If Coinbase meets the KPIs for "product revenue sharing" and "ecosystem revenue sharing" after the agreement expires, it has the right to automatically renew for three years, with unlimited renewals.
Ecosystem Cooperation Agreement: Stipulates that if Circle and Coinbase want to introduce new ecosystem partners, both must agree in writing. This means Circle is effectively deeply bound within Coinbase's ecosystem and cannot independently expand its ecosystem resources.

The agreement also includes a "legal obstacle exit clause": If future laws prohibit Circle from paying promotional fees to Coinbase, both parties must negotiate to amend the terms. If negotiations fail, Coinbase has the right to demand that Circle transfer all trademarks and intellectual property, including USDC and EURC, to Coinbase.

This clause is clearly set up to guard against the possibility of future regulations prohibiting "disguised interest payments" to promoters. For example, if users hold USDC on Coinbase and receive a 4% return, this interest is actually paid by Circle to Coinbase, which then transfers it to the users. If future laws prohibit this indirect rebate mechanism, Circle would have to stop paying promotional fees.

It can be said that Coinbase and Circle are very "shrewd" in their agreement design, considering almost all potential legal risks and locking Circle completely within its system through the agreement terms. Circle is no longer just a partner but resembles a "sub-ecosystem unit" of Coinbase.

Hazel: This is basically a sellout agreement, right?

Zheng Di: Yes, I have also studied the structure of this agreement. What if Circle has no legal obstacles but simply refuses to pay the revenue share? In fact, the agreement does not set up an arbitration mechanism. However, since the agreement is governed by New York State law, Coinbase can fully file a lawsuit in New York. If Circle refuses to fulfill the agreement, I believe it would likely lose in most cases. The court would probably support the continuation of the agreement, and if Coinbase is sufficiently assertive, it might directly demand that Circle hand over trademarks and intellectual property. In this case, Circle would basically be unable to escape this agreement.

4. Insights into Coinbase's Risks and Opportunities

Hazel: You just mentioned the 4% interest rate; in fact, the USDC deposit rate that Coinbase is currently offering users is not just 4%, but has been subsidized to an annualized 12%. This level is already perceived as "too good to be true." When Chinese users see guaranteed returns of over 10%, many immediately think, "Is this a scam?" But in reality, this is to meet the renewal conditions in the cooperation agreement with Circle, attracting users by increasing the USDC yield?

Zheng Di: You ask a great question. Although many people think these two cooperation agreements are undisclosed, they are actually attached to Circle's prospectus. It's just that the specific data details are not disclosed. According to U.S. securities regulations, major cooperation agreements and key personnel employment contracts of publicly listed companies must be disclosed.

Returning to the agreement itself, Coinbase must meet two prerequisites to obtain the "unlimited automatic renewal right" of the agreement:

Product revenue sharing KPI must be met;
Ecosystem revenue sharing KPI must be met.

The threshold for ecosystem revenue is relatively simple to understand; for example, Coinbase must continue to support USDC trading pairs, the main chain deployment of USDC, compatibility with the official wallet, etc. Whether there are exclusivity requirements for the platform is not clearly disclosed in the current agreement.

The KPI for the product revenue sharing part may have set a minimum threshold, such as a certain proportion of USDC that must be held on the platform, but the specific amount has not been publicly disclosed.

According to public information, Coinbase has received about $300 million in revenue sharing from Circle this year, but at the same time, it has invested about $100 million in "deposit incentives"—that is, encouraging users to deposit USDC on the Coinbase platform. Why is Coinbase willing to spend this $100 million? I believe there are two possible explanations:

One is that the agreement stipulates a gradually increasing KPI threshold. To meet it, Coinbase must spend money to attract more USDC deposits;
The other is that even without a mandatory threshold, Coinbase knows that the more USDC it has on its platform, the more revenue share it will receive. Since these subsidies are paid by Circle, and there is no cost pressure on itself, it is naturally willing to promote it.

As for why Coinbase offers as high as a 12% USDC deposit rate, I believe their strategy has shifted. Previously, they focused more on attracting spot users and directing funds to U.S. exchanges. But now, with the launch of ETFs, U.S. retail investors can invest in BTC and ETH through ETFs without needing to buy on Coinbase, and the fees are much lower.

Coinbase's market maker trading fees typically range from 0.02% to 0.06%, while ETF fees are estimated to be similar, so Coinbase's spot trading fee income is under pressure to decline.

Currently, over 64% of Coinbase's revenue comes from "altcoins," with XRP and Solana being the largest contributors: XRP accounts for about 18%, and Solana accounts for 10%, totaling about 28%. If XRP or Solana launches an ETF in the future, these trading fees will also be impacted.

Therefore, the market may not realize a practical issue: the more ETFs there are, the harder it is for Coinbase to operate its spot business. If the U.S. really launches more than 40 crypto ETFs in the future, Coinbase's domestic spot business will have almost no competitiveness.

So where does Coinbase's path lie? I believe it is in two directions:

Offshore Market (Coinbase Global): Currently only accounts for 20% of its total revenue, but has huge growth potential;
Derivatives Business: Not covered by ETFs, and competition is not as fierce. Coinbase's recent acquisition of Deribit is a key step in this layout.

From a strategic perspective, acquiring Circle is not cost-effective. Because Circle can no longer escape the constraints of the agreement, Coinbase has already gained significant benefits from the agreement and has no need to pay a high price to buy the entire company. They can simply continue to extract profits from Circle.

Thus, Coinbase is no longer focused on how to "milk the spot trading" from domestic users but is shifting its energy towards offshore exchanges and derivatives trading. For example, this 12% interest rate subsidy is not given to all users but is concentrated on Deribit accounts or Global users. Initially, the subsidy threshold was low, such as no limit on deposit amounts, but later, due to a large influx of Chinese users, it quickly dropped to a limit of 1 million USDC per account, and now it is only 100,000.

But some "profit-seekers" will operate through multiple KYC and multiple accounts; for example, with 10 accounts, they can achieve a limit of 1 million and enjoy an annualized interest rate of 12%. However, Coinbase's core focus is on "conversion rate": when you deposit money, you may not trade immediately, but a portion of people will eventually trade. As long as this portion converts, it recoups the costs.

5. The Genius Act and the Future of Stablecoins

Hazel: A few days ago, I read a report from Artemis, which analyzed the $240 billion stablecoin market. The report begins by pointing out a trend: the stablecoin industry is shifting from an "issuance-oriented" model to a "distribution-oriented" model. It is becoming increasingly difficult for issuers to maintain profits, while channel capabilities are starting to become the core competitive advantage. This also brings us back to the issues we discussed earlier regarding USDT and USDC. Especially after the stablecoin legislation was introduced, everyone is pondering: after compliance, what impact will various stablecoins face? For instance, in the context of a large number of compliant institutions entering the market, can Tether maintain its leading position?

Zheng Di: I believe the answer depends on the final version of the Genius Act. Many people mistakenly think that the Democrats oppose stablecoins while the Republicans support them, but that is not the case. When the FIT21 bill passed in the House this year, there were also 71 votes in favor from the Democrats. This indicates that promoting the development of stablecoins has become a bipartisan consensus. Even Elizabeth Warren, who is considered the most anti-crypto, has publicly stated that stablecoins could grow to $2 trillion within the next three years and will strongly support the global dominance of the U.S. dollar. Her opposition to the Genius Act mainly revolves around two aspects:

First, the issue of corruption has not been resolved. She criticized the bill's amendments for prohibiting senior government officials from participating in stablecoin businesses but not prohibiting individuals at the presidential or vice-presidential level, such as concerns about the Trump family's issuance of the USD-1 stablecoin. Second, the bill lacks effective regulation for offshore stablecoins, especially targeting Tether.

As I mentioned before, USDT's (Tether) main source of profit currently comes from that 18% of "non-compliant assets." This includes about 100,000 bitcoins, 50 tons of gold, and investments in Bitdeer—many may not know that Tether is already the second-largest shareholder of Bitdeer, holding 25.5%.

Additionally, it holds a controlling stake in an Argentine sugar company, Adecoagro, with a 70% ownership. Many people do not realize that Tether is currently one of the largest lenders in the entire Web3 industry, with total debts amounting to around $8.8 billion. Besides that, it has other forms of investments and revenue channels.

If the final Genius Act does not impose strict long-arm jurisdiction on offshore stablecoins, then Tether's offshore model can continue to exist and enjoy arbitrage opportunities. It could even launch a compliant version of a stablecoin in the U.S. as a "facade project," while its main business continues to profit from the offshore model.

Thus, we may see that the offshore market remains USDT's "comfort zone," while in the onshore market, it has no advantages in compliance and licensing. For example, in Europe, Tether has not obtained the relevant licenses under MiCA (the Markets in Crypto-Assets Regulation), so it has already been delisted. In contrast, USDC can still be used in the European market, including some stablecoins that have obtained MiCA approval, which can continue to participate in traditional payment scenarios.

However, to be fair, the trading scenarios in Europe themselves have little profit margin. We can see this from the case of Bistamp: this established European exchange, founded in 2011, ended up selling to Robinhood for only $200 million, which is quite surprising. This also indicates that the trading business in Europe "has little profit," and even if compliant, the significance is limited.

While payment scenarios still have some potential in Europe, overall, the onshore market competition has become very fierce. USDC has to face USD1, Stripe's USDB, and various stablecoins issued by the banking system. These participants all have a compliance foundation and come with traffic or payment network resources, making competition increasingly intense.

You can see the limitations of other stablecoins in the market:

PayPal's PYUSD was initially thought to be a "wolf coming," but now it only has a circulation of around $800-900 million, and I guess a significant reason is reluctance to pay promotional fees;
USDC has a circulation of $61 billion, but the cost is that it has allocated about 60% of its revenue to pay promotional fees, which is essentially an extremely capital-intensive growth model;

In contrast, USDT goes completely against the grain, not only not paying promotional fees but instead charging partners a fee of 10 basis points. Tether's logic is: I open the API for you, allow you to mint and redeem, and support you in market making, which is already "giving away money," so you should pay me instead.

However, we cannot rule out another scenario: if Warren's insistence and the voices of some Democratic lawmakers ultimately lead to the addition of strict provisions targeting offshore stablecoins in the bill, completely closing off the space for "regulatory arbitrage," then Tether's existing model would be difficult to sustain. Therefore, the key ultimately depends on regulatory attitudes. Will regulators truly impose penetrating restrictions on offshore stablecoins? This is fundamental to determining the future landscape.

6. The Two-Stage Rocket of Stablecoin Development

Zheng Di: I have always believed that the future development landscape of the stablecoin market can be described as a "two-stage rocket." The first stage will be driven by traditional financial institutions, mainly including major banks, card organizations (such as Visa and Mastercard), and payment companies (like Stripe and PayPal). This stage's application scenarios will focus on the payment field, especially in cross-border receipts and payments, cross-border payments, import and export trade, and commodity settlement.

In fact, Tether (USDT) has already entered the trade financing field for commodities, using stablecoins as financing payment tools. This type of application is expanding rapidly and is an important breakthrough for stablecoin development. Many people ask me, "How can we possibly reach a stablecoin scale of $2 trillion by 2028?" I believe that the main path to this goal is not through "trading scenarios," but through payment scenarios.

The current "promotional fee" model is actually more used in exchange scenarios. In other words, stablecoin project parties pay fees to platforms, wallets, and other channels to promote user usage, but this is a transaction-oriented distribution strategy.

However, in the future, similar promotional logic may also appear in payment scenarios—such as issuers subsidizing payment institutions, banks, or corporate clients. This promotional method for such scenarios has not fully matured yet, but I believe it will be established quickly because competition will be very fierce.

This is the first stage of the "two-stage rocket": growth driven by payments led by traditional financial institutions, rapidly expanding the scale of stablecoins.

The second stage will depend on when the U.S. SEC (Securities and Exchange Commission) officially relaxes the issuance thresholds for Security Token Offerings (STOs) and significantly simplifies compliance processes. In fact, the new SEC chair, Gary Gensler, publicly stated about a month ago that he would promote this direction. I believe this could very likely be implemented in the next two years.

Once STO compliance is widely relaxed, the era of everything being on-chain will arrive. At that time, not just crypto assets, but all financial assets, including traditional securities, bonds, and funds, could potentially circulate and trade in tokenized form on-chain.

In this process, the demand for on-chain transactions will significantly increase again, and stablecoins, as important tools for on-chain payments and settlements, will also welcome a second wave of explosion. Even further, as Michael Saylor mentioned in February this year, the total market value of stablecoins is expected to reach $10 trillion in the future, which is not a far-fetched idea.

Hazel: But I want to know, is it really that easy to break user habits and network effects? For example, Binance spent a lot of money promoting BUSD, but it ultimately did not succeed particularly well. Circle has spent years connecting with countless partners for business development, advancing regulatory communication, and opening channels. Is it really that easy for newcomers to surpass these accumulations?

Zheng Di: What you said makes a lot of sense, but it also depends on what perspective you take on the main usage scenarios of stablecoins. If you believe stablecoins are primarily 2C (consumer-facing), then indeed, as you said, occupying user mindshare is difficult, and the barriers for newcomers will be very high.

But the problem is, we are now entering a new stage: stablecoins are becoming legalized, transparent, and gradually entering payment scenarios. Looking at the current circulation of stablecoins, most are still used for transaction-related transfer scenarios, and the proportion of true "pure payment" usage is still relatively small. Although we hear about some offshore payment cases, such as Russia selling oil using some settlement method, the scale of such gray paths is ultimately hard to compare with the global compliant financial system.

What is rapidly growing now is the transparent cross-border payment scenarios. The demand in this area is real, and the number of participants is increasing. More importantly, payment scenarios are primarily 2B (institutional, platform, enterprise-level), rather than 2C. You can think of stablecoin payments as a form of "underlying payment technology." It changes the backend, not the frontend that users see.

For example, when you swipe your card, you may still see VISA, Mastercard, Apple Pay, etc., but the underlying clearing and settlement technology can already be replaced by stablecoins. Companies like Bridge, which provide on-chain payment infrastructure, can sell for $1.1 billion at a 100x PS because of their potential for "seamless technology replacement."

The collaboration between LianLian and BVNK follows a similar logic. Ordinary consumers do not need to know the names Bridge or BVNK; under this architecture, user unawareness is the biggest advantage. You change the underlying system, and users do not need to be re-educated. Because it is a 2B scenario, the replacement and competition of stablecoins in these areas are not that difficult. Corporate cooperation often depends more on the exchange of interests, such as how much promotional fee you are willing to share.

Assuming I am Meta, I have a vast ecological scene, and if you want me to integrate your stablecoin system into the platform, it is still "up to Zuck." Most Meta users do not have a clear understanding of "stablecoins." They only know that they receive tips, payments, or settlements on Facebook or Instagram, but do not know what assets are used underneath. Because of this, I believe that in the next 1-2 years, payment scenarios will be the most important incremental breakthrough for stablecoins. In contrast, the significant expansion of trading scenarios will have to wait until the STO (Security Token Offering) process is truly simplified and everything on-chain begins to take shape, at which point the demand for on-chain financial ecosystems will become active again.

7. Large Tech Companies and Stablecoins

Hazel: We just mentioned Meta, and I have always had a question. According to the vision of the Genius Act, the issuer of stablecoins should be regarded as a "financial institution," right? But Meta is a technology company. So can it not issue stablecoins itself, but instead have other institutions with financial licenses issue them, while it is responsible for usage and distribution? Or can Meta establish a financial subsidiary to issue coins, thereby "bypassing" the identity restrictions?

I happened to discuss this question with friends this morning. They asked: With Meta being so large, why not directly acquire a bank and let the bank issue stablecoins?

On the surface, this sounds reasonable, but I want to say: If it were that simple, Meta would have done it long ago. Why doesn't it issue stablecoins directly but instead runs pilot projects on Instagram and collaborates with external stablecoin projects? This indicates that the issue is not that simple. The core reason is likely that the Genius Act imposes "penetrating regulation" on "large platform technology companies." In other words, whether you control a bank, establish a subsidiary, or find a concerted actor, as long as regulators believe that Meta has substantial control or participation, it will still be restricted.

In other words, even if you use a shell company to issue stablecoins, even if it has a financial license, if it is actually operated by Meta behind the scenes, it may still be restricted. The Genius Act may be intended to clearly delineate a red line: technology platforms cannot directly control the issuance of stablecoins.

Of course, there is also a possibility that the current regulatory framework has not yet fully landed, and even Meta itself is observing. They do not know whether the final enforcement of the new regulations will truly penetrate into subsidiary or indirect shareholder operations. But from the current perspective, "not personally getting involved and passively collecting promotional fees" is actually a more prudent choice for Meta.

So I believe that Meta is not unable to do it, but rather it is unnecessary to do it. If you really go to issue stablecoins, then you have to accept the regulation of financial institutions. For a technology platform, this means complex processes, significant responsibilities, and extremely high compliance pressure. Conversely, if Meta insists on being a "scene entry point," it can completely embed stablecoins as a means of payment or interaction into its platform, allowing others to bear the compliance, regulatory, and settlement risks.

I have always said that the current Web3 is increasingly resembling the internet. Ultimately, it is "scenes are king, traffic is king," rather than who controls the infrastructure. You see so many public chains, stablecoins, and settlement systems; technically, anyone can do it, but the true value core lies in those with real scenes and users. If Ethereum is too expensive, I will look for Aptos, which is cheap but not widely used; if Tron is too slow, I will switch to another chain. Platforms like Meta, with enormous distribution capabilities and user bases, do not need to "dive in" personally into heavily regulated areas.

8. Financial Stablecoins or Tokenized Market Funds

Hazel: Regarding some non-mainstream types of stablecoins, such as the financial stablecoins like Ethena-USDe that have garnered attention from last year to this year, which have "interest-bearing properties," what is their future direction after compliance?

Zheng Di: My judgment is that these types of stablecoins may always remain a niche market. According to current legislation in the U.S. and Hong Kong, it will be very difficult for such interest-bearing stablecoins to move towards "legitimization." Although BitMEX founder Arthur Hayes and others have publicly supported this model, in reality, regulators are highly cautious about such products. This means that the future space for these stablecoins is likely limited to certain "non-compliant gray areas" or small-scale experimental environments, making it hard to enter the mainstream financial system.

The direction that truly has the opportunity for "legitimization" is actually TMMF (Tokenized Money Market Funds). This is also why Circle announced the acquisition of Hashnote in January this year. This company's positioning is to create compliant TMMF products on-chain. Circle also clearly stated in its prospectus that they have observed a trend: large registered merchants on-chain are increasingly inclined to use TMMF as collateral instead of traditional stablecoins.

Why? It's simple. In the on-chain financial environment, especially in scenarios like market making, leveraged trading, and clearing, stablecoins themselves are non-interest-bearing assets. If you use stablecoins as collateral, there is no interest income during that period. TMMF, on the other hand, is essentially a money market fund, and as long as it is collateralized, it generates annualized returns.

For large amounts of capital and active leverage in on-chain market making, these interest payments constitute a very important source of income. Therefore, many on-chain market making platforms and liquidity pools are gradually starting to accept TMMF as collateral instead of stablecoins.

This actually means that stablecoins are no longer the only "base currency" option in on-chain financial scenarios. Moreover, if TMMF products can achieve high-frequency settlements in the future, such as daily settlements, and even further establish exchange channels with stablecoins, they may also possess payment functionalities in some 2B payment scenarios, especially in large cross-border transactions, corporate settlements, and supply chain finance. These are not scenarios for C-end consumers to buy coffee, but rather enterprise-level bulk settlements. In such applications, interest income and settlement efficiency are more important than "payment experience," so TMMF may occupy a place in these scenarios in the future.

9. Changes and Constants in the Old System

Hazel: We also just mentioned Visa and Mastercard. As global card organizations, they have significant influence in the cross-border payment field. Circle itself also has a network called CPN. I am curious about what the future relationship between this CPN network and Visa and Mastercard will be. Especially if, as you said, Visa and Mastercard push for change themselves in the future, is it possible that they could directly "eat up" a portion of the stablecoin market?

In fact, Visa has already begun to test stablecoins. They invested in the UK stablecoin payment service company BVNK through Visa Ventures. This company was led by Horn Ventures, which you should be familiar with; the founder of Horn was the former legal head of the SEC, who later founded a VC, with a16z becoming its largest LP. Horn Ventures is now also one of the more well-known investment institutions in the U.S. This round of financing also included follow-on investments from Coinbase and Tiger Global.

BVNK mainly provides stablecoin solutions for LianLian's European division. In Visa's recent quarterly earnings call, they specifically mentioned that they have processed approximately $300 million in stablecoin payments cumulatively. Of course, this figure is negligible compared to Visa's overall transaction volume, but it indicates they are testing the waters.

In reality, stablecoins do pose a challenge to Visa and Mastercard. I previously conducted a rough quantitative analysis. The main revenue structure of Visa and Mastercard is roughly: 60-65% comes from card transaction fees, and 35-40% comes from value-added services. Their core competitive advantage lies in their KYC (Know Your Customer) and AML (Anti-Money Laundering) systems, as well as the entire payment network.

We need to ask a question: If stablecoins are widely adopted in the future, can they do so without KYC and AML? I believe it is impossible. Therefore, Visa and Mastercard may still rely on KYC/AML interfaces to charge service fees in the future. They can act as globally recognized KYC/AML API providers, and even if they are not the dominant players in transactions, they can still collect "toll fees."

In other words, whether it is Circle, Tether, or other stablecoin companies, they will ultimately need to connect to a credible large compliance interface. Visa and Mastercard are likely to play this role. In scenarios with high KYC/AML requirements, their service value still exists. In low KYC requirement scenarios, they may face some challenges.

My judgment is that Visa and Mastercard's gross margins may decline by 5 to 7 percentage points, and their total revenue may be impacted by 20% to 30%. However, their core business should not be significantly affected. At the same time, they must embrace this trend; otherwise, they will be squeezed by new players. They also need to actively participate in rule-making, especially around the opening of compliance interfaces.

However, so far, we have not seen Visa and Mastercard take substantial actions in building the underlying infrastructure for stablecoins. Currently, banks and local payment networks like Zelle and Singapore's PayNow are more active, as they hope to issue stablecoins themselves.

Circle's CPN network is indeed technically advanced, such as its cross-chain zero-confirmation payment capabilities, which are user-friendly. But from an investment perspective, what matters more is whether it can generate actual revenue. Investors are more concerned about scene promotion and monetization capabilities. The two core scenarios for stablecoins are trading and payments. I believe that at least in the "legitimized" payment scenario, the current path is still primarily one of "integration," rather than a complete revolution.

In other words, the current route is about how to embed into the existing financial system and replace a portion of intermediaries and channel players. This is also why cross-border payments have become a key breakthrough direction. Card organizations, payment institutions, and banks actually have grievances against SWIFT. Many participants now hope to bypass SWIFT and establish their own links, and the U.S. government is also willing to participate in regulation, as long as they can still control KYC/AML. Therefore, SWIFT has become a relatively weak link. The promotion of stablecoin payments is an attempt to carve out a piece within the traditional financial system and embed it, rather than overthrowing and rebuilding it. I believe this path is feasible and can develop quickly.

Once the U.S. Genius Act is passed, the biggest promoters may be banks and payment institutions, and it is even possible that card organizations will join in. However, currently, the most active players are Stripe and several large banks. In contrast, small and medium-sized banks may face significant challenges, especially those that heavily rely on savings lending and card issuance for profits.

The U.S. Treasury's advisory body, TBAC, has proposed a viewpoint: if the Genius Act is passed, there could be as much as $6.6 trillion in deposits "moving." However, large banks are not worried about this because they can issue stablecoins themselves and have diversified businesses to hedge against risks. The most concerned are small and medium-sized banks. Once they lose deposits, they lose their credit creation ability. Additionally, many small banks rely on card issuance commissions. If this area is also replaced by stablecoins, they may struggle to survive. This means that the passage of the act could trigger a wave of closures among small and medium-sized banks in the U.S.

Hazel: This reminds me of the discussions about central bank digital currencies (CBDCs) that were hot a few years ago, where people were concerned that central bank issuance would lead to the "disintermediation" of commercial banks. The logic is quite similar. However, while central bank issuance may not work, stablecoins could indeed cause similar results, especially for small and medium-sized banks.

Zheng Di: That's right, but I believe that on-chain banks will definitely emerge. Large banks may find that stablecoins can be used not only for payments but also for lending. Once stablecoin payments are widely accepted, people will be willing to stay in stablecoins rather than immediately converting them into fiat currency, and the circulation scale of stablecoins will expand.

Currently, most on-chain lending protocols are collateralized loans, primarily using Bitcoin as collateral, with an LTV ratio of 64% and an interest rate of 8.5%. This business essentially provides loans to "the wealthy." Why is no one willing to offer unsecured loans? Because there is a lack of a scoring system like FICO. However, if traditional import and export businesses are willing to accept stablecoin settlements and have a sound credit rating, on-chain unsecured loans can be realized. Banks will also find that issuing and attracting deposits in stablecoins for lending can be profitable, which could give rise to "stablecoin banks."

Therefore, small and medium-sized banks will indeed face "disintermediation," but credit creation will not disappear; it will simply take on a different form and involve a new set of players. Traditional research often states that financial disintermediation weakens credit creation capabilities, but I do not fully agree. The pathways for credit creation may change, and the participants will change.

10. Circle Founder Jeremy Allaire and the Story with China

Hazel: We just talked about some investor information disclosed in Circle's prospectus, which includes investment institutions from China, such as IDG Capital and Huaxing Capital. This has surprised many people—because many are unaware that Chinese capital invested in Circle during its early days, and this investment now appears to have extremely high returns, potentially reaching billions of dollars in less than ten years, making it a classic case in the venture capital field. So the question arises: How did this Chinese capital enter Circle?

Zheng Di: It's actually not complicated. Ten years ago, the crypto industry was a period of high activity for Chinese capital. From the origins of USDT (Tether) in Hong Kong to Ethereum and other early public chain projects, there was significant participation from the Chinese community. Chinese investors were the main players in the early trading markets of Web3, and the mining sector also accumulated substantial funds, with many mining operators participating in early equity financing.

At that time, Chinese VCs were also at the peak of the mobile internet boom, with ample funds and a willingness to explore the new direction of Web3.

Circle's CEO Jeremy Allaire placed great importance on the Chinese market during that phase. He not only built a local team but also visited Chinese regulatory agencies multiple times to communicate with the central bank and research institutes. At that time, he clearly hoped to introduce USDC or the concept of stablecoins to China and promote local cooperation.

Hazel: I actually have some personal experiences with Jeremy that I can share:

The first time I met him was in 2018, during a brief interview in the lobby of a hotel in Beijing. At that time, stablecoins were far from being as widely recognized as they are today.
The second time I met him was at a closed-door seminar. This was after the Libra incident, when stablecoins became the focus of policy discussions. At that time, I organized a weekend meeting at Caixin, where the director of the Central Bank Digital Currency Research Institute and Wu Jihan from Bitmain attended. I happened to facilitate Jeremy's participation in this small closed-door meeting; he had specifically come from overseas and appeared in the office over the weekend. He still held expectations for China's participation and regulatory acceptance.
The third time was at Davos in 2022. That year, due to the pandemic, the winter meeting was moved to May, making it the only "snowless" Davos. Circle was one of the main sponsors that year, and I could see their large advertisements as soon as I arrived at the station. We met again, but this time he no longer talked about China; instead, he focused on U.S. compliance policies and stablecoin legislation. At that time, the draft of the "Stablecoin Act" was being discussed in the U.S. Congress.

The biggest impression I got from these exchanges is that he is truly adhering to a very steady and pragmatic approach. In a crypto industry filled with "pirate culture," he insists on being "the navy," sticking to the path of compliance, and has really brought Circle to its current scale, which I initially thought was a pipe dream.

Speaking of Jeremy himself, he is actually a very typical Silicon Valley serial entrepreneur:

He co-founded Allaire Corporation with his brother in 1995, went public in 1999, and by 2001, the company had revenues exceeding $100 million, eventually selling to Macromedia, which was later acquired by Adobe. He became the CTO of Macromedia and made significant contributions to core products like Flash Player; some of the products they developed at Allaire are still in Adobe's suite today.
In 2004, he founded Brightcove, an online video platform, which went public in 2012 and was just privatized earlier this year (2025).
In 2013, he founded Circle, exploring various business avenues such as exchanges, payments, and stablecoins, ultimately focusing on USDC, and is set to officially IPO in 2025.

In my view, he is a steady and forward-looking entrepreneur. Although Circle explored diversification in its early years, such as acquiring exchanges and developing wallet services, once he determined that USDC was the main avenue for the future, he resolutely pursued it. I greatly admire his ability to maintain a sense of direction in a highly volatile and uncertain industry.

11. Circle's Future Possibilities and Limitations

Hazel: Does Circle still have new stories to tell? Besides the current main line of USDC and the content mentioned in the prospectus, can it expand into entirely new businesses? For example, as you mentioned earlier, there are regulatory restrictions, but Tether has already ventured into commodity payments. Can Circle also expand into similar scenarios? Or can it integrate with emerging fields like AI or promote new currency products like euro stablecoins? What is your view on the future of stablecoin companies?

Zheng Di: I believe it can certainly expand, but the biggest issue is whether there is enough funding. Why can Tether enter the commodity space? Because it is genuinely lending. We must understand that while there is demand for stablecoin payment scenarios, it is not as strong as the demand for financing scenarios. Especially in buyer or seller credit—if you can lend me money, that is real strength.

Tether's strategy is to leverage funds to activate scenarios. Its total loan amount has reached $8.8 billion, with approximately $14 billion in self-capital investment, plus some other investments, bringing its overall external investment and loan scale to about $30 billion. In an offshore state, if it continues to be "non-compliant," this $30 billion "checkbook" can easily promote the use of stablecoins, especially in commodity scenarios. It has essentially become more than just a stablecoin company; it is a model of stablecoin + bank.

In this case, it is much easier for Tether to drive stablecoin payments through loans. Circle cannot do this because it lacks lending capabilities. If it can only persuade others to use USDC through business development (BD), it will be very difficult. Unless there are large buyers like the Trump family willing to fully adopt USDC, that is a possibility. But essentially, they are looking for resource relationships, such as establishing connections with the Trump family.

A similar situation exists with Ant Group promoting RWA projects in Hong Kong. Buyers are willing to participate, to some extent, to establish cooperative relationships with Ant. This indicates that scenario-driven approaches do not rely solely on payments but on credit capabilities. Tether binds loans and payment scenarios: lending with USDT and receiving payments also in USDT; you have to accept it because the funders have the say.

The biggest problem for Circle is that it does not have this "checkbook" and cannot strongly control scenarios, and its resources are limited. Most of its funds need to be invested in promotional expenses, and it must comply, making it difficult to earn excess profits. Therefore, from a business perspective, its story appears relatively mediocre, relying on industry tailwinds to accumulate slowly.

In contrast, Tether has already begun acquiring publicly listed companies. For example, its acquisition of the Argentine company Abaco Agro not only has business in commodities and agricultural imports and exports but also participated in agricultural blockchain projects as early as 2017, holding a 10% stake. This shows its high acceptance of blockchain and crypto, allowing Tether to integrate these resources. Behind this is capital strength, lack of regulatory constraints, and the benefits of first-mover advantage.

Upon deeper investigation, it becomes clear that Tether and Circle are fundamentally different entities. If Circle lacks the ability to control the scene, it must "cling to a big leg." The scenarios that Coinbase can provide are also limited. We can even pose the question: in three to five years, if Robinhood and Coinbase have similar profits and market values, who will win? Most people might choose Robinhood because it has a broader user base and more scenarios. Robinhood has also acquired Bitstamp, expanding into the European market.

Thus, Coinbase's biggest problem is insufficient scenarios and users, and it may even be losing users, especially in its spot trading business. So when I say Circle has not clung to a big leg, it is not just a matter of political resources but also commercial resources. For example, Stripe is an important partner after Bridge launched USDB, and it even exchanged equity. There are also banks, card organizations, payment companies, and large commodity traders in China, all of which are important partners.

These could potentially bring scalable usage to stablecoins. What Circle needs to focus on now is how to penetrate these scenarios and whether it can bring in a strategically significant major shareholder.

Additionally, China should now realize that the competition between the digital renminbi (CBDC) and private stablecoins has a clear outcome. In fact, a more effective path is to allow private companies to issue stablecoins, with the government enforcing strict regulations, KYC, and anti-money laundering controls, and then promoting these stablecoins overseas. This "soft control" model is actually superior to the officially led CBDC model. This is also why more and more people are calling for the issuance of offshore renminbi stablecoins; for instance, Dr. Shen Jianguang from JD.com has specifically written articles pointing out that China cannot be absent from this track.

In the future, in the international trade and commodity payment scenarios we envision, the competition among stablecoins will not only involve competition among U.S. dollars but will also include euro and renminbi stablecoins. You need to consider one question: who are the most important players in global commodity and goods trade? It is not the United States, but China. The U.S. is strong in service trade, but in the realm of physical goods, China is undoubtedly the main player.

If in the future China promotes offshore renminbi stablecoins, and Chinese enterprises no longer use USDT or USDC but instead use renminbi stablecoins, this would pose a significant competition to existing U.S. dollar stablecoins. Therefore, I believe this track has broad prospects, but the competition will be very fierce.

The space for technological innovation is actually limited; for example, the entry threshold for AI is not very high, and currently, it seems that the direction of AI agents is also not easy to break through. Large model companies have started to create their own agents, no longer just providing basic models. Those who were excited about starting agent businesses last year have now found that their advantages are no longer obvious after large model companies entered the field. So from a technical standpoint, the threshold is not that high; what is truly valuable is the scenarios and users. If Circle abandons its main business in pursuit of flashy directions, it may run into problems. It should focus on deepening its core business.

As for the future possibilities of non-U.S. dollar stablecoins, I believe the most promising are the euro stablecoin and the offshore renminbi stablecoin. Many countries around the world have already dollarized, with the widespread use of dollar stablecoins in Latin America, Africa, and Turkey.

If China and Europe do not promote their own stablecoins, they will fall behind in the new generation of financial order. Therefore, I do not think they will allow a stablecoin company controlled by the U.S. to take on the task of issuing non-U.S. dollar stablecoins.

Hazel: Let me give another example. What would happen if Meta used USDC?

Zheng Di: If Circle can successfully bind Meta and make Meta its strategic shareholder, it would be a key breakthrough. You know, there is already a similar agreement between Circle and BlackRock. During the validity of the agreement, BlackRock is the sole manager of the Circle Reserve Fund, managing funds that could reach hundreds of billions of dollars. In exchange, BlackRock cannot issue stablecoins on its own or support other stablecoins, only supporting USDC. In this way, Circle has essentially "bound" BlackRock.

So, can Circle bind Meta in a similar way? Binding a large tech company to fully integrate into its ecosystem, rather than just simple cooperation discussions, such as Meta using USDC today and possibly using USDP or USD1 tomorrow. Or it could go to Trump and "grovel" for cooperation, which is also possible. But if it can sign an exclusive agreement, such as making Meta a strategic shareholder and exclusively promoting USDC, then Circle's prospects would be limitless. The question is whether it has the capability to facilitate such a binding.

12. Institutions Entering in Droves: What Investment Opportunities Are Left for Ordinary People

Hazel: We are running out of time today, so let's discuss the last question. With Circle pushing for an IPO so aggressively, is this market trend coming to an end? From the perspective of ordinary investors, what opportunities are still available with so many institutions entering the market?

Zheng Di: I believe there are definitely still many investment opportunities. At this stage, opportunities are mainly concentrated in crypto stocks, specifically Web3-related stocks. Many companies that are doing well in Web3 may ultimately choose to go public or merge with a public company. A large number of Web2 companies will also gradually "add Web3," just like the past trend of "adding the internet" or "adding AI." This is because the wealth effect of Web3 in the stock market is very evident.

The logic behind this is quite simple: companies can reduce costs or increase revenues through Web3, and as long as the fundamentals are solid, there is a possibility for stock prices to be driven up. This is an important insight for listed companies, founding teams, and entrepreneurs in the Web3 space. Currently, liquidity and wealth effects are clearly concentrated in the stock market.

From an investor's perspective, the focus should now be on crypto stocks. Once the macro environment becomes more accommodative in the future, attention can then shift to altcoins. At that time, altcoins may truly start to see market activity. The flow of funds determines market hotspots.

Hazel: Today’s discussion has been very enjoyable, and I feel we have delved deeply into this topic. We will continue to release more content related to digital currencies, stablecoins, cross-border payments, and other relevant topics. If you agree with the viewpoints we shared in the program and believe this is a vast track, then continuing to follow our podcast should bring you many rewards and possibly uncover some opportunities worth paying attention to. Thank you, everyone!

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