BlackRock to Handle Circle's USDC Cash Reserves as Part of $400M Funding Round

On Tuesday, cryptocurrency payments firm Circle announced a $400 million funding round led by asset management firm BlackRock, with further investments from Fidelity Management and Research, Marshall Wace LLP, and Fin Capital.

As part of the deal, BlackRock will become "a primary asset manager of USDC cash reserves"—the fiat currency backing the Circle-issued USDC stablecoin.

Last month, it said it would rely on Bank of New York Mellon to be the main custodian of USDC reserves. Circle CEO Jeremy Allaire hasn't commented on how custodianship will be split among BlackRock, BNY Mellon and others, but told Forbes Circle will “explore ways to apply USDC in traditional capital markets.”

It could be lucrative for the asset managers. Circle—which is valued at $9 billion and in February announced its plans to go public—has projected $438 million in revenue from stablecoin reserves for this year and $2.2 billion in 2023.

USDC, which Circle launched in partnership with Coinbase, has been taking a bite out of Tether's market dominance. According to data from CoinMarketCap, USDC is the second-largest stablecoin with a circulating supply of 50.6 billion compared to Tether's 82.6 billion. A year ago, USDT's circulation was 45.9 billion to 11.3 billion for USDC, meaning USDC has closed the gap slightly.

But Circle's funding deal, partnerships with traditional financial institutions, and regulatory compliance efforts may put it on track to overtake Tether, which had a three-year head start. 

Indeed, Circle controls a lot more cash than Tether, which as of December 31, held just $4.2 billion of its (then) $78.7 billion in reserves in U.S. dollars; much of it is invested in tokens, bonds, and short-term company debt known as commercial paper. The rub on commercial paper, according to Federal Reserve Chair Jerome Powell, is that it's highly liquid until a crisis hits, meaning a run on stablecoin redemptions could lead to USDT losing its peg. 

While Tether CTO Paolo Ardoino said Wednesday that his firm is committed to reducing the percentage of reserves held in commercial paper (which currently stands at 30%), Circle is much further along in that effort, which suits regulators and banking institutions eager to assure investors that dollar-pegged stablecoins are really backed by dollars.  

In August 2021, Circle sait it would put all reserves in cash and short-term U.S. Treasuries. An October 2021 report attested that all of its assets had been allocated toward cash and "cash equivalents," which refer to "highly liquid investments" that mature within 90 days of purchase.