Source: Silicon Valley 101

Compiled & Translated by: Daisy, ChainCatcher

Editor's Note:

This article is compiled from the audio interview between podcast host Hongjun and Liu Feng with guests Can Sun and Zheng Di. Hongjun is the host of "Silicon Valley 101," Liu Feng is the host of "Web3 101," a partner at BODL Ventures, and former editor-in-chief of ChainNews. Guest Can Sun is the co-founder and legal compliance officer of Backpack Exchange, who was deeply involved in the legal framework design of USDC; Zheng Di is a frontier investor focused on finance and crypto technology.

The interview uses Circle's IPO as a starting point to delve into the differences between USDC and Tether (USDT) in terms of compliance paths, profit models, and alliance structures, extending to future regulatory trends for stablecoins, changes in platform dynamics, and strategic possibilities in conjunction with AI and global settlement networks.

The following is a compilation and translation of the interview content.

TL;DR:

• Circle becomes the first publicly listed stablecoin issuer, with USDC seen as the representative of the "digital dollar," leading to a surge in market capitalization and attention.
• The stablecoin market is heating up, with compliant USDC and non-compliant USDT competing, while traditional finance and tech giants accelerate their entry.
• Coinbase is deeply tied to USDC, which drives its rapid expansion but limits long-term profits due to revenue-sharing agreements.
• Tether dominates the market with a high-yield, high-risk model, while Circle adheres to a compliant and transparent route, resulting in a significant profitability gap.
• Regulatory proposals like the "Genius Act" are expected to reshape industry order, pushing stablecoins towards legalization and institutionalization.
• Circle is building an on-chain global settlement network, integrating AI payment scenarios, aiming to become a new infrastructure for digital finance.

Comparison of USDC and Tether's Systems and Profit Models

Hongjun: The first question is, why is Circle's IPO so highly sought after? Can, what do you think?

Can Sun: The core value of USDC lies in its role as a settlement and payment tool for the digital dollar. The traditional financial payment system has seen almost no substantial changes for decades; bank transfers are limited by working hours, and overall efficiency remains stuck in the last century. Circle has digitized the dollar, enabling real-time settlement globally 24/7, which is a fundamental upgrade for the entire financial system.

Another highlight of Circle's IPO is that the underwriting institutions include traditional financial giants like JP Morgan and Goldman Sachs, which are also exploring the issuance of stablecoins. If they incorporate USDC into their existing clearing systems in the future, USDC could potentially become the "official" digital dollar. Therefore, Circle's IPO not only represents the success of a tech company but also reflects traditional finance's positive attitude towards the prospects of the digital dollar.

Zheng Di: Circle's deep binding with Coinbase limits its profitability. From a fundamental perspective, the $7 billion IPO valuation is reasonable, but the rapid increase to a $25 billion market cap reflects more of the market's scarcity expectations for compliant stablecoin targets.

The stablecoin market itself has enormous growth potential. Two data points are worth noting: first, the U.S. government and institutions like Standard Chartered predict that by 2028, the global stablecoin market size will grow from the current $250 billion to $2 trillion; second, more aggressive views, like those of Michael Saylor, suggest that the market size could reach $10 trillion in the long term. Under such growth expectations, investors are willing to assign higher valuations.

Hongjun: Is the $2 trillion referring to the total size of the entire stablecoin market?

Zheng Di: Currently, Circle holds about 24% to 25% of the stablecoin market share. If its market share remains unchanged, after the overall market expands eightfold, Circle's corresponding asset size could grow to $480 billion or higher.

Hongjun: To add some background information, Tether, the issuer of USDT, is an offshore entity and is not subject to U.S. regulation; while USDC is issued by Circle, which is registered in the U.S. and subject to state regulations, making it a compliant stablecoin. As of now, the global stablecoin market cap is about $250 billion, with USDT around $150 billion, accounting for 62.5%; USDC around $61 billion, accounting for about 24%.

So, what specific aspects reflect USDC's "compliance"? It is understood that Circle disclosed a lot of operational costs and compliance information in its IPO prospectus, while Tether is seen as one of the most profitable crypto companies currently.

Can Sun: The U.S. currently lacks a unified federal-level stablecoin regulatory law and does not have a complete framework like the EU's MiCA. USDC's "compliance" is mainly reflected in its operation under the supervision of various states, especially the New York State Department of Financial Services (NYDFS), and it must comply with regulations regarding reserve management and audit disclosures.

USDC publishes its reserve structure monthly, with all funds allocated to government money market funds and short-term U.S. Treasury bonds, held by large banks or independent trust companies, and subject to audits. In contrast, while Tether has also begun to disclose its reserves in recent years, the types of assets are more complex, and its transparency is relatively low.

Liu Feng: Regarding the "Genius Act," can you introduce the most impactful provisions for the industry? What impact could this legislation have on Tether and the entire stablecoin industry?

Can Sun: This bill has not yet been formally passed and is still under negotiation in the U.S. Congress. Once implemented, it will become the first federal-level stablecoin regulatory framework, bringing significant benefits to the industry, as clear regulations will allow traditional financial institutions like banks and funds to participate legally.

The most critical provision states that any stablecoin wishing to circulate in the U.S. or serve U.S. users must obtain regulatory approval from the U.S. or accept equivalent regulation recognized by the U.S. Otherwise, the government can prohibit it from being listed on U.S. exchanges and has the authority to freeze its dollar reserves.

This provision has a particularly significant impact on Tether. Most global dollar settlements rely on the U.S.-led clearing system; even if Tether holds dollar accounts offshore, as long as its clearing bank is located in the U.S., the U.S. government has the ability to cut off its dollar flow.

Liu Feng: So, the U.S. can directly "choke" through the dollar system?

Can Sun: Yes. If Tether cannot meet U.S. regulatory requirements, the government can require banks to stop holding its dollar reserves. Once the reserves are frozen, USDT will lose its ability to maintain a 1:1 peg with the dollar, which would be a fatal blow for the stablecoin. The U.S. has historically used the financial system as a tool for sanctions, and countries like Iran and North Korea have been restricted because of this.

Liu Feng: Do you think Tether has the ability to meet the relevant regulatory requirements? Is it possible for it to operate legally and compliantly in the U.S.?

Can Sun: The Tether team has the capability and is indeed pushing for compliance and transparency. However, whether it can meet U.S. regulatory requirements in the short term remains uncertain. Especially under higher regulatory standards, its reserve structure and corporate governance may require more time for adjustments.

Liu Feng: This means that future competition will be fairer. In the past, Tether benefited from regulatory arbitrage, while USDC bore higher compliance costs. As the rules become more unified, Tether will have to catch up.

Can Sun: Yes, the crypto industry generally has a practice of "no regulation first, then compliance later." Many projects initially operate offshore and seek compliance after growing. However, once the U.S. implements strict regulations, institutions like Tether will be required to meet regulatory standards from the start and will no longer be able to rely on regulatory loopholes for survival.

Hongjun: We just analyzed the reasons for USDC's attention; next, let's review Circle's development path. The company was founded in 2013, and USDC was launched in 2018. Can, were you involved in the legal documentation for the joint launch of USDC with Coinbase at that time? Additionally, why did Circle choose to enter the stablecoin space initially? How did the collaboration with Coinbase come about?

Can Sun: In 2018, the stablecoin market was almost monopolized by USDT, and the transfer and compensation of assets between exchanges heavily relied on USDT. However, due to its offshore operations and lack of transparency, there were significant risks. Circle was exploring diversification at that time, having businesses like Poloniex exchange, OTC trading, and payment tools, but these did not form a core breakthrough.

They realized that the market lacked a compliant stablecoin, so they partnered with Coinbase to establish a joint venture called Center to jointly launch USDC. Both companies held 50% of the shares and were jointly responsible for the issuance and governance of USDC, aiming to build a transparent, compliant, and auditable stablecoin system.

Liu Feng: Circle's early business was quite diversified, involving Bitcoin wallets, payment products, OTC trading, and operating the Poloniex exchange. Subsequently, the company gradually divested these businesses and ultimately focused on USDC. Can this be seen as a "strategic all-in"? How did you view this transition at that time?

Can Sun: Yes, Circle gradually divested its Bitcoin wallet, OTC trading, Poloniex, and other businesses after 2019, focusing instead on USDC. At that time, there were doubts about this "give up everything" strategy, as Poloniex still had scale, and the OTC business had stable institutional clients.

However, Circle anticipated that compliant stablecoins could become an important part of future financial infrastructure. Whoever could enter the market first and establish ecological barriers could potentially become the core bearer of the "digital dollar." The transparency and compliance of USDC earned it recognition from large institutions, payment companies, and even governments.

The company judged that this was a "winner-takes-all" track, and the strategic value of the stablecoin ecosystem far outweighed the short-term profits of other marginal businesses.

Hongjun: According to Circle's prospectus, although Coinbase has exited as a shareholder of Center, it still retains 50% of the interest income from USDC. What is the background behind this revenue-sharing agreement? What are your thoughts on it?

Can Sun: This revenue-sharing agreement was established when USDC was initially set up. Coinbase provided critical resources for USDC, including user channels, wallet systems, and exchange listing support. In return, Circle signed a revenue-sharing agreement with them.

The agreement stipulates that as long as Coinbase meets specific growth KPIs each year, it can renew the agreement and continue to receive 50% of the USDC interest income long-term. So far, Coinbase has indeed met these targets.

This also means that although Circle bears the issuance, operation, and legal responsibilities, it can only retain half of the revenue, with the other half going to Coinbase, limiting its profitability.

Zheng Di: Essentially, Coinbase plays a "laying down to earn" role. It does not bear the legal and regulatory responsibilities of USDC issuance but, through early binding, has obtained a long-term profit-sharing mechanism, almost becoming a "perpetual dividend platform." Although Circle's overall profits seem considerable, they shrink significantly after the revenue sharing.

Can Sun: Yes, but from a strategic perspective, this binding relationship did help USDC quickly open up the market in the early stages. As a compliant exchange, Coinbase promoted the listing of USDC and integrated wallet support, establishing a solid initial ecosystem for it. Although this "share first, win later" strategy was a reasonable choice at the time, it has now placed Circle in a relatively passive position regarding its revenue structure.

Liu Feng: This reminds me of another question. In recent years, Binance has gradually reduced its support for USDC and instead promoted a stablecoin called USD1. It is rumored that USD1 is backed by the Trump family and an Abu Dhabi fund. Can, what do you think about this trend?

Can Sun: USD1 is issued by First Digital, headquartered in Hong Kong and registered in Abu Dhabi. Binance has a close relationship with it, mainly because the project provides the platform with greater bargaining power and revenue sharing. In contrast, USDC is deeply tied to Coinbase, which means Binance not only bears the usage costs but also cannot gain revenue sharing, leading to a gradual reduction in support. This phenomenon reflects a trend in the stablecoin market: major platforms are beginning to support their own or partnered stablecoins, gradually forming different alliance camps.

Zheng Di: The current stablecoin market can roughly be divided into five major camps:

1. The Tether-led USDT camp, which has the largest market share and the widest application but relatively weak compliance.
2. The USDC camp, led by Circle, emphasizing compliance and transparency, and deeply tied to Coinbase.
3. The Binance-associated USD1, which has obvious platform attributes and a complex capital structure behind it.
4. The tech company camp, including PYUSD issued by PayPal and USDB supported by Stripe, leveraging their own payment networks to promote stablecoin adoption.
5. The traditional bank camp, such as JPM Coin from JPMorgan and internal stablecoins from Citibank, mainly used for B2B settlements between institutions.

Liu Feng: How do you think these stablecoin camps will evolve in the future? Will it ultimately form a duopoly, or will they each occupy different markets?

Zheng Di: I believe the stablecoin market may eventually form a structure similar to operating systems, dominated by two to three players. Just like Android and iOS, one is open but riskier, while the other is closed but emphasizes compliance, and both can coexist in the long term.

Tether will continue to serve non-compliant markets, DeFi, and high-risk trading, while compliant stablecoins like USDC will gradually enter mainstream financial systems such as payments, settlements, and banking.

Hongjun: We just mentioned the differences in profit models between USDC and USDT. Can you explain specifically how stablecoin issuers achieve profitability? For example, after a user redeems 1 USDC, how does Circle generate income?

Can Sun: The profit model of stablecoins is relatively simple. When a user redeems 1 USDC, Circle receives 1 dollar in reserves. This money is invested in highly liquid, low-risk assets like U.S. Treasury bonds and money market funds, currently yielding about 4% annually.

Since USDC holders do not earn interest, all the income belongs to the issuer, creating a clear "interest spread"—stable asset returns can be obtained without paying interest.

Liu Feng: So if Circle currently manages about $61 billion in USDC, at an annual yield of 4%, it would generate about $2.4 billion in interest income each year?

Can Sun: Theoretically, yes, but the actual income needs to deduct various costs, such as the revenue share paid to Coinbase, operational expenses, and audit fees. Even so, Circle remains profitable, especially during periods of rising interest rates, where interest income significantly increases.

Zheng Di: Tether's profit model is relatively more aggressive. Although its reserves also include safe assets like U.S. Treasury bonds and cash, disclosed information shows that it also includes high-risk assets like Bitcoin, gold, and equity in unlisted companies, resulting in an overall yield significantly higher than Circle's.

Market estimates suggest Tether's annual profit may exceed $6 billion, while Circle's is less than half of that. This also enables Tether to continue making large dividends, investments, and acquisitions.

Circle's Development Strategy and the Trend of Stablecoin Alliances

Hongjun: It sounds like Tether operates more like a hedge fund rather than a financial infrastructure provider?

Can Sun: Indeed. Tether's operations are closer to those of an asset management firm, relying on user reserves for high-yield investment portfolio allocation. While the returns are considerable, the credit risk is also relatively high.

In contrast, Circle is more akin to a banking model, emphasizing asset transparency, compliance, and low-risk management, without engaging in high-risk investments. Although the returns are lower, it is more credible within regulatory agencies and the financial system.

Liu Feng: Will regulators allow Tether's "high yield, high risk" model to exist in the long term? Especially in the event of a run, could it potentially cause systemic shocks to the entire crypto financial system?

Can Sun: This is a very real issue. Tether's market cap is more than twice that of USDC, accounting for over 60% of the stablecoin market. If a liquidity crisis or major default occurs, it could trigger a "Lehman moment" for the crypto financial system.

To address this, many DeFi protocols and trading platforms have begun to hedge risks, such as diversifying the use of multiple stablecoins, setting position limits, or adopting a stablecoin basket mechanism to reduce reliance on a single stablecoin.

Zheng Di: Although Tether has not defaulted so far, under the backdrop of tightening regulations, it will either be forced to move towards transparency and accept regulation or continue to operate in a "gray area," with the latter's space becoming increasingly limited.

In contrast, if Circle can gradually penetrate the traditional financial system, such as establishing clearing partnerships with Visa, Stripe, and banks, it is likely to expand its market share in the long term. However, this path is slower, has higher operational costs, and relatively limited profit margins.

Hongjun: It can be said that this is a game between high yield and compliance stability. Tether profits quickly and has high returns but comes with significant risks; while Circle's path is stable, legal, and compliant, it has relatively limited income.

Can Sun: Yes. Tether's success relies on its first-mover advantage and rapid expansion during the early market gap; while Circle bets on regulatory trends and the long-term evolution of traditional financial systems.

Liu Feng: How do you see the development of these two models in the coming years? Is it possible for Circle to gradually catch up to Tether, or will Tether continue to maintain its lead?

Zheng Di: It's difficult to make a clear judgment, as it depends on several key factors. First is the regulatory process—whether the U.S. can establish a clear legal framework for stablecoins in the next two to three years; second is whether financial institutions are more inclined to cooperate with compliant models; and finally, whether Tether can continue to maintain high yields while effectively controlling risks.

I tend to believe that the future stablecoin market will present a "dual-track" structure: one track serving high-risk DeFi and offshore platforms, primarily with USDT; the other track aimed at institutional settlements and compliant scenarios, dominated by USDC or other new compliant stablecoins.

Can Sun: I agree with this assessment. Just as the current financial system is divided into banking and shadow banking systems, stablecoins may also move towards dual-track development in the future. However, in key countries and core financial scenarios, the market share of compliant stablecoins is expected to gradually increase.

Technological Evolution of Stablecoins and Emerging Application Scenarios

Hongjun: We have discussed the past and present of stablecoins; finally, I would like to ask you to look ahead to future development directions. What application scenarios might USDC enter next? Besides expanding market share, does Circle have any new strategic layouts?

Can Sun: Circle's current core strategy is to build a global settlement network. The company has launched a protocol called CCTP (Cross-Chain Transfer Protocol), which supports seamless transfers of USDC across multiple blockchains and connects with the banking system, essentially creating an on-chain dollar settlement system.

Compared to traditional dollar settlement processes, USDC offers advantages such as real-time arrival, low cost, and transparency with traceability. If Circle can successfully connect various countries' payment systems with the USDC network, it could establish its position as the global settlement standard.

Zheng Di: Another important direction is the integration of AI and stablecoins. More and more AI companies are building automated payment systems for payroll, contract execution, cost accounting, and cross-border settlements, which are very suitable for completion through stablecoins.

USDC has advantages such as on-chain transparency, programmability, and rapid settlement, making it suitable as a foundational settlement asset for AI enterprises. In the future, AI systems may directly connect to on-chain payment APIs, achieving full automation of cash flows, which will become an important new application scenario for stablecoins.

Liu Feng: It can be said that AI is becoming a "multiplier" for stablecoins. An AI system that operates around the clock, combined with a payment network that settles around the clock, will significantly enhance the efficiency and automation of cash flows.

Can Sun: Yes. Circle has collaborated with some AI automation companies to develop prototype products, including features like automatic invoicing, bookkeeping, contract execution, and USDC settlement. Once these tools mature, the application of stablecoins will no longer be limited to the crypto trading field but will gradually integrate into mainstream business scenarios such as corporate financial systems, SaaS platforms, and financial software.

Future Landscape of Stablecoins and Winning Rules

Hongjun: How do you view the trend of traditional banks issuing stablecoins? For example, JPMorgan's JPM Coin has already launched, and Wells Fargo, Citibank, and others are also exploring similar projects. Will these banks become competitors to Circle?

Can Sun: Most stablecoins issued by traditional banks operate on private chains, limited to settlements between banks or specific large clients, forming a closed system that cannot connect to mainstream wallets or DeFi protocols.

In contrast, USDC is an open network that any individual or institution can use, and developers can freely connect. This is akin to the difference between the internet and a local area network—banks' stablecoins are more like a local area network for internal use, while USDC is an open internet with stronger compatibility and scalability.

Zheng Di: However, the power of banks should not be underestimated. They have a large customer base, extensive branch networks, and compliance advantages. If regulations loosen in the future, banks will have the capability to quickly promote their own stablecoins.

The key for Circle is to establish its position as a "financial infrastructure" within a compliant framework. Once its stablecoin becomes the settlement layer of the mainstream financial system, it can create strong network effects and first-mover advantages.

Liu Feng: How do you see the potential structural changes in the stablecoin industry in the coming years? Among various participants like Circle, Tether, traditional banks, and tech companies, who is more likely to emerge as the winner?

Zheng Di: In the next five to ten years, stablecoins will gradually evolve into financial infrastructure. Projects with real long-term development potential need to possess three capabilities: first, to gain regulatory recognition; second, to achieve practical application in payment scenarios; and third, to have the ability to build a global settlement network.

From the current perspective, Circle is the only project that is likely to meet all three requirements simultaneously. Tether has strong profitability but has significant shortcomings in compliance; bank-issued stablecoins have compliance advantages but closed technical architectures; stablecoins launched by tech companies have application scenarios to support them, but user trust in their financial attributes remains limited.

Can Sun: Ultimately, the key to competition lies not in market capitalization but in who can become the "settlement foundation of the digital financial system." Just like today's SWIFT and VISA, the competition among stablecoins will be a multidimensional contest of settlement efficiency, credit levels, regulatory compliance, and ecosystem building.

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