Original Article Title: "A 20,000-Word Analysis of Circle, Can Investors Still Understand?"

Original Source: Hazel, Ivy, Nothing Left Unsaid

The surge of Circle to a market cap of $470 billion was perhaps the most desolate episode for the crypto community. Asking a few friends in the circle, most either missed the opportunity or sold too early. Those external to the circle who listened to our podcast, however, had a few who bought in and made money. The most regretful thing is probably not losing money on your own crypto investments but rather missing out while watching outsiders profit.

On the podcast Nothing Left Unsaid and in the second part of the conversation on Circle with Di, a verbatim transcript is now available. The amount of information is enormous, and I will try to share some highlights here. For the remaining content, please refer to the link at the end of the article. This article is for fundamental analysis purposes only and does not constitute any investment advice.

【Tether and Circle, Two Different Species】

Di Zheng: Although Tether and Circle are both engaged in stablecoin business, they are actually two different species. This difference primarily stems from two key factors:

1. Compliance Difference: Circle has basically achieved 100% reserve compliance, while Tether is about 80% compliant with regulatory requirements, with the remaining 18% not meeting the requirements of the "BitLicense." However, it is worth noting that Tether's main source of profit comes from this non-compliant 18%.

2. Funding Scale: Tether's current external investment and lending scale has reached $30 billion. Although often questioned about compliance issues, when a non-compliant company has already hugged the current Secretary of Commerce's thigh, and giants like SoftBank and Masayoshi Son have already boarded their ship, with a $30 billion check that can be used, can't it pave a compliant path using the money? It definitely can. When you have money and have climbed the political ladder, it's a hard fact. Therefore, in my opinion, for Circle to achieve its target valuation of $250 billion or even higher, it will face a substantial challenge.

【Is the Narrative of Crypto-Friendly Banks Still Relevant?】

Di Zheng: What story did Zhao An tell? Zhao An roughly said, I own 43% of Zhao An Bank, and then I am also one of the sandbox experiments for Circle's Hong Kong stablecoin, an early shareholder of Circle, with a single-digit percentage ownership, possibly not exceeding 10%. So, first, this portion of my Circle assets will be valuable in the future. Second, if Circle achieves, for example, a $500 billion Hong Kong dollar stablecoin scale, most of the funds will be in my Zhao An Bank, and I only need to give him a 2% interest deposit. Just tell this kind of story, and it doubled in a week.

Why do I feel that this story is a bit fishy? Because first of all, the concept of a crypto-friendly bank is actually outdated. Initially, we knew why the U.S. stock market's Metropolitan Bank and Signature Bank (which was not yet public at the time), Metropolitan Bank, and Silvergate were performing very well. Silvergate even became a rare ten-bagger in the U.S. banking stocks, roughly a ten-bagger in about two to three years. Why? It's because at that time, even giants like Coinbase, the U.S. only had three banks willing to do business with it, and other banks wouldn't open accounts for it. So the fiat currency deposited by customers could only exist in Metropolitan Bank, Silvergate, and Signature Bank.

These three banks don't need to compete at all; they simply accept fiat deposits from these Web3 enterprises and trading platforms, and they don't have to pay interest; it's a zero-interest scenario. And then they take this interest-free money to trade bonds and MBS and make a profit; the interest rate spread can be over 2.5%. However, as more and more banks are willing to serve Web3 enterprises and trading platforms, the era of zero-interest savings, as in the past, is long gone.

Of course, Zhongan didn’t tell this story, just mentioned 2%. But there are several issues here. First of all, actually, we know that the main bank for the Web3 industry in Hong Kong should be Standard Chartered, not Zhongan. Zhongan is actually a virtual bank, of course, it is more friendly, but after all, it is not a main bank. We also know that Coinbase Singapore, in fact, its receiving bank is also Standard Chartered. Standard Chartered is just more aggressive, has a better appetite, willing to take on this business, so it is more friendly than other banks. So the main bank in Hong Kong actually uses Standard Chartered, and it is unlikely that all or most of the reserve deposits for the coin are in Zhongan Bank.

【Behind the Story of New York's BitLicense】

Zheng Di: We who are deeply involved in the Web3 industry should know what is really difficult to obtain, that is the New York BitLicense. Of course, Circle also has this license, and there are only a total of 20 licenses in the world. But in fact, you will find that the transaction volume throughout New York with the BitLicense is very, very low. The business you can do with this license is very limited. Every quarter, the New York Department of Financial Services publishes these numbers.

But why do people still tirelessly pursue the New York license? Because this is a symbol of strength, this is an endorsement. Meaning, I give this to all other states, including to the federal government, to all other countries. For example, if I have to deal with the Monetary Authority of Singapore MAS, the Hong Kong Securities and Futures Commission, or the Dubai Financial Services Authority, or Japan's Financial Services Agency. I tell you, if I have one of New York's 20 BitLicenses, are these licenses insignificant to me?

Setting up BitLicense actually started in 2013. Back then, didn't New York hold a hearing? And then they said, "New York, you're regulating too strictly. You should loosen up; otherwise, the United States will lose its technological leadership in Web3, right?" The idea of BitLicense actually originated from that hearing in '13.

At that time, the host of the hearing was the New York regulatory agency, who ultimately came up with the BitLicense. But what's especially funny is that after inventing this set of BitLicense regulations, he resigned before issuing the first license and started his own consulting company. He provided consulting services to all applicants for the license. I assume Circle may have also hired him, I'm not sure, but I guess it's him because he invented it. Who else is more suitable to be a consultant to guide you on how to obtain this license than the person who designed it himself? So, by opening a consulting firm, he also made a lot of money.

So you see, in the United States, quid pro quo has existed since ancient times. It has always been a society based on business, right? That's why I say the narrative in the stock circle, thinking that USDT is not compliant and won't survive in the future while USDC is compliant and will take over market share, is not tenable.

Below is the full text of this conversation

· Guest: Didier Zheng, Frontier Tech Investor, Manages the Knowledge Planet "Dots Institutional Investor Community"

· Host: Hazel Hu, Host of the Podcast "Speaking of Money," with over 6 years of financial media reporter experience, Mandarin Public Good Fund GCC Core Contributor, focusing on the practical application of encryption.

1. Wild Stock and Coin

Hazel: Let's start with what everyone is most concerned about, the stock price. Didier, how do you evaluate Circle's performance in the first two days of trading?

Didier: Regarding Circle's IPO pricing, I think the initial position was relatively reasonable, and there was indeed an investment opportunity. However, I have always believed that there are still many hidden concerns in Circle's model in the long run. So, I don't quite understand why it could be speculated to reach $25 billion (Note: As of the time of writing this article, Circle has surged to $35 billion). Some people even told me $80 billion, $100 billion, right? In fact, these days I don't have much qualification to comment on this stock price because I have been educated by this stock speculation circle for several days, saying that one must have a long-term perspective. But in fact, I feel there is a huge information gap and cognitive asymmetry between insiders and outsiders.

In the cryptocurrency field, we are all used to using USDT and are well aware of Tether's actual strength. Some believe that Tether and Circle, although both engaging in stablecoin business, are actually two different species. This difference mainly stems from two key factors:

1. Compliance Differences: Circle has essentially achieved 100% reserve compliance, while Tether is about 80% compliant with regulatory requirements, with the remaining 18% not complying with the FATF's Travel Rule. However, it is worth noting that Tether's main source of profit comes from this 18% non-compliant portion.

2. Fund Size: Tether's current external investment and lending scale has reached $30 billion. Although often questioned about compliance issues, when a non-compliant company is already cozying up to the current Secretary of Commerce, and heavyweights like SoftBank and Masayoshi Son have already boarded their ship, not to mention the availability of a $30 billion checkbook, can it not bash out a compliant path with the money? It definitely can. Having money and political resources at hand is a hard fact. Therefore, in my view, for Circle to achieve its target valuation of $25 billion or higher, it will face substantial challenges.

Hazel: Personally, I feel that there are still too few high-quality assets in the Web3 field of the Web2 domain, so when a decent target appears, everyone starts rushing in.

Zheng Di: The meme frenzy and the success of Trump Coin over the past year, while significant personal achievements, may be a tragedy for the entire Web3 industry. It further reinforces the industry's external label of "casinoization" and drains a large amount of liquidity. The alt-season usually requires a loose liquidity environment, but the Fed has not cut rates yet. Market expectations have shifted from an optimistic five rate cuts at the beginning of the year to two rate cuts at the fastest (possibly in September), with former Dallas Fed President Rob Kaplan (currently Vice Chairman of Goldman Sachs) predicting only two rate cuts over a month ago. Even some large U.S. buy-side institutions believe there will be no rate cuts throughout the year.

In this environment, Bitcoin continues to show strength, with its market dominance remaining in the 60%-65% range. The altcoin market continues to suffer from low liquidity, with funds mainly concentrated in Bitcoin and a few top projects. This also explains why organizations like ConsenSys, part of the Ethereum core team, are pushing for Ethereum's version of "MicroStrategy" (such as SBET). During Dubai's 2049, everyone was discussing that Ethereum cannot be shorted next, and are they going to switch the venue. I think they are referring to ConsenSys' move to operate SBET. Because their initial fundraising was over $400 million, they have already bought over $300 million, right? And then there's another $1 billion in ATM, will they continue? Of course, it also depends on their funding ability and their premium, which is also very important, and their operational situation.

I have previously posted on my planet and also relayed someone else's statement. Currently, there are five major themes in the US stock market: Web3, autonomous driving, robotics, nuclear power and fusion, and quantum computing. When liquidity is relatively good, focusing on these five themes can generally be profitable. This year, we have seen that the wealth generated from stocks and coins is actually much higher than that of altcoins. Therefore, the resilience of stocks is also better than that of Bitcoin. What I have observed is that a large number of large holders in the cryptocurrency community and mining bosses have transferred funds in large quantities to the stock market to speculate on stocks in this cryptocurrency field.

I have written about a company called Canaan, which is a US stock market mining listed company affiliated with Bitmain. Currently, its computing power has reached 32EH. If the next 18EH is injected, it will quickly reach 50EH and enter the ranks of listed miners. Many of these inflows are actually related to mining power. You will also see some miners who hope to cash out through stock trading. For example, there is a company that implemented a coin-hoarding strategy for Solana called DFDV, which originally focused on DeFi but later shifted to hoarding Solana coins, causing its stock price to increase by a hundredfold. In Singapore, there is also a company that was originally engaged in medical services but saw a significant rise in its stock price after announcing its intention to hoard Bitcoin. Therefore, I believe that the stock market is currently very eager for Web3 assets.

A few days ago, a friend asked me to help analyze an issue, essentially entrusting me to conduct a free "research project." He asked me, why is there such a big difference in the stock price performance between MetaPlanet and Hong Kong's Gionee, even though Solar Ventures' Jason serves as an advisor for both?

I am also pondering this issue. One possible reason is that Hong Kong lacks local funds, and investors have more alternative targets to choose from, so they may not necessarily need to buy Gionee. Whereas the Japanese market is relatively more closed, with a large volume of local funds. Therefore, when concepts similar to "Japan's version of MicroStrategy" like MetaPlanet emerge, the market is willing to invest. It could also be because of a better and more concentrated chip structure that is more easily manipulated by the market. Of course, I have not conducted in-depth research yet, these are just some initial observations.

This incident illustrates a phenomenon: the current frenzy of "coin stocks" is not limited to the US stock market. We see MetaPlanet in the Japanese market and projects like BoYa and Gionee in the Hong Kong stock market. Although their price increases may not be as dazzling as MetaPlanet, they have all achieved several-fold growth.

Hazel: It's not just companies that have bought coins, right? Some Hong Kong stocks, which are not significantly related to coins, have also seen their stock prices skyrocket.

Zheng Di: That's how it is now. You may say you have not explored related businesses, but the market believes you have. You cannot say you haven't. If I say you have, then you have. For example, companies like Zhongan, LianLian, and YiMi Card have seen explosive growth, basically doubling within a week.

What story did Zhongan tell? Zhongan roughly said, I own 43% of Zhongan Bank, and I am also one of the sandbox trials for Circle's Hong Kong stablecoin, a early shareholder of Circle with a single-digit percentage ownership, possibly not exceeding 10%. So first, my assets in Circle's coin will be valuable in the future. Second, if Circle's coin achieves a stablecoin scale of 500 billion Hong Kong dollars in the future, most of the funds will be held in my Zhongan Bank, and I only need to provide a 2% interest deposit to them. Just tell such a story, and the result doubled in a week.

Why do I feel that this story is not very convincing? Because first of all, the concept of crypto-friendly banks has actually passed. We originally knew why the US stock Metropolitan Bank, Signature Bank (which was not listed at the time), Metropolitan Bank, and Silvergate were hyped. Silvergate even became one of the few ten-baggers in US bank stocks, roughly tenfold in two to three years. Why? It's because at that time, even giants like Coinbase, the US had only three banks willing to do business with it, and other banks refused to open accounts for it. So the fiat currency deposited by customers can only be held in Metropolitan Bank, Silvergate, and Signature Bank.

These three banks do not need to compete at all; they just accept the fiat deposits of these Web3 enterprises and trading platforms and do not need to pay interest, it's interest-free. Then, they use this interest-free money to trade securities like government bonds and MBS and make a profit from the interest rate spread of 2.5% or more. But with more and more banks willing to serve Web3 enterprises and trading platforms, the era of interest-free savings deposits like before is gone for good.

Of course, Zhongan did not tell this story, just mentioning 2%. But there are several issues here. First of all, we actually know that the main bank for the Web3 industry in Hong Kong should be Standard Chartered, not Zhongan. Zhongan is actually a virtual bank, albeit more friendly, but it is not a main bank after all. We also know that Coinbase Singapore actually chose Standard Chartered as its receiving bank. In short, Standard Chartered is more aggressive, has a larger appetite, and is willing to take on such business, so it is more friendly than other banks. So in Hong Kong, the main bank actually uses Standard Chartered, so it's unlikely that all or most of Circle's deposits will be held in Zhongan Bank.

Furthermore, we need to know that both the relevant US laws and the stablecoin consultation paper issued by the Hong Kong Securities and Futures Commission in July last year prohibit stablecoin issuers from paying interest directly to users. We need to consider why. The reason is likely that everyone is afraid of such intense competition because later competitors will definitely say that they pay interest while the predecessors do not, so they will promote it, and this kind of competition will weaken the financial strength of stablecoin issuers. If they become weaker, they may be more likely to collapse, which could lead to serious social events and have a very negative impact. Thus, they prohibit directly paying interest to users. Of course, there are ways to circumvent this, such as using referral fees, but in any case, literally, you are not allowed to pay interest directly.

We also need to consider a certain issue. When you create an HKD stablecoin compared to a USD stablecoin, what is your biggest disadvantage? Your interest rate is low. Whether you buy CNH government bonds, Panda bonds, or HKD, I'm not sure if HKD has government bonds, I haven't researched it in detail, but regardless of what you buy, your interest rate is low. On the other hand, in the United States, you can easily get 4% just like that, so this is a disadvantage.

So many people haven't noticed that in last year's July consultation paper, it was allowed, which means the SFC actually allows Hong Kong stablecoin issuers to engage in asset mismatch. This means that even though you issue an HKD stablecoin, you can actually buy, for example, RMB government bonds, such as CNH government bonds or Panda bonds, currently with an issuance scale of three hundred billion. For instance, you can buy U.S. government bonds to enjoy a high interest rate, but you must obtain special approval from the Hong Kong Securities and Futures Commission. Additionally, you need to maintain excess reserves to hedge against currency mismatch exchange rate risk. Once these two conditions are met, you can go ahead and buy high-grade sovereign bonds denominated in other currencies, not necessarily limited to HKD deposits.

Therefore, I believe that there is a huge information gap between the stock circle and the stablecoin research community in the long run. Hence, many are more inclined to believe in such narratives, leading to a doubling in value in a week.

2. The Licenses of Payment Companies

Zheng Di: Both LianLian and Moka have claimed that I obtained the U.S. Money Transmitter Service license, but in fact, in the coin circle in 2018, trading platforms were very keen on obtaining this Money Transmitter Service license as well as this payment license in the U.S. We all know that these licenses are not actually that difficult to acquire. Especially, the Money Service Provider (MSP) license is quite easy to get; you might have to pay around 1 million USD to acquire this kind of license, I'm not sure about the current price, but it was that price back then.

At that time, our feeling was that this Web3 industry seemed like you were doing some kind of futile work that didn't actually help the business. Now, how did it turn into a story for these stock companies and these listed companies? The stock trading circles don't understand these matters either; they wonder if you need a difficult-to-obtain license, but those of us deeply involved in the Web3 industry should know what is truly hard to get, such as the New York State BitLicense. Of course, Circle also holds this license, and there are only 20 of these licenses issued worldwide, but in reality, you will find that the New York State BitLicense has a very, very low transaction volume in the state of New York. The business you can conduct with this license is quite limited. Every quarter, the New York State Department of Financial Services publicly releases reports.

But why do people tirelessly pursue a New York state license? Because this is a symbol of strength, it is an endorsement. When I talk to other states, including the federal government, or when I deal with other countries like the Monetary Authority of Singapore (MAS), the Securities and Futures Commission of Hong Kong, or the financial regulatory authorities of Dubai and Japan, I can say, "I am one of the 20 BitLicense holders in New York State. Aren't these licenses trivial to me?" Because regulators in other countries will think that the regulatory threshold in New York State is the highest and strictest in the world, with only 20 licenses available worldwide, making it difficult to obtain. These licenses from other countries, other states will open doors for you. So the reason why everyone is willing to obtain this license is for this very reason.

Even the boss of the New York Stock Exchange (NYSE) now operates an international trading platform, with a market value of around two billion dollars. After MicroStrategy stopped cooperating with him, the price plummeted, but why has it been consistently rising recently? I think the market is still speculating on whether someone will acquire it. What value does it have? Its current business is actually very minimal, with first-quarter transaction fee revenue of only 12 million, even before MicroStrategy stopped cooperation, so we will definitely see a significant drop in the second quarter. But its only valuable asset is that it holds one of the 20 New York State licenses. Therefore, everyone is speculating whether there is a possibility of someone acquiring it for these licenses.

So when we look at these payment institutions, whether they have some U.S. payment licenses or Money Service Provider licenses, the stock market will use various narratives. The current narrative in the stock market, I feel, is very similar to the ICO model in 2017. It's like I tell a story, everyone believes it, everyone thinks it's amazing. But no one ever thinks about what's behind it. However, in the Web3 industry now, these users have already been trained to be skeptical. Whatever you say, I won't believe it. Unless you really implement buybacks and dividends, even if you have cash flow, I still won't believe it; I will only believe it if you actually implement buybacks and dividends. It's all like this now, it's also a manifestation of the lack of liquidity. In the stock market, I think liquidity is still abundant, and it tends to believe first and then figure it out, make money first, and the ones who believe later are the bagholders. So this is the current logic.

However, I still want to say that when a payment company introduces stablecoin payments, for example, like LianLian, I have also written an analysis of LianLian. I haven't studied the Move Card yet, LianLian is partnering with BVNK, a UK stablecoin payment company. I believe that under optimistic circumstances, it will help it turn losses around. Under optimistic circumstances, I believe it can increase profits, adding approximately 180 million in net profit. Its current pre-tax loss is about 500 million, so it can still partially turn the losses around, and there is still significance in this. In other words, it can increase profits by about 0.2% to 0.3% of the total payment volume, and indeed, stablecoin payments can bring some additional revenue, so speculating in some of the Web2 payment companies in the market, I think, also makes sense.

Hazel: You just mentioned the New York State financial license. I actually remember that back in 2018, Circle was the first to obtain the BitLicense, right? Because at that time, I was just starting in the industry as a news reporter, and I think I have some recollection of that.

Zheng Di: Yes, this matter is actually very interesting and quite amusing. That's why I think it particularly reflects the model of the combination of power and money in the United States. That's why I always say, don't think USDT is non-compliant. They have now cozied up to the Secretary of Commerce, whose son used to be an intern at Tether and is now on board with Tether. I say it's actually USDC that hasn't noticeably cozied up to anyone big. The power-money exchange in the U.S. has actually been going on for a long time. When did New York State even have this idea of establishing the BitLicense? It actually started in 2013. Remember that New York State had a hearing? They said that New York State was regulating too strictly and that they should loosen up, otherwise America would lose its technological lead in Web3, right? The idea of BitLicense actually originated from that hearing in 2013.

The host of that hearing at the time was from the New York State regulatory department, and it was this official who came up with the BitLicense. But what's particularly amusing is that after he invented this BitLicense framework, before even issuing the first license, he left; he resigned and started his own consulting company. He provided consulting services to all license applicants. I guess Circle might have hired him, I'm not sure, but I assume it was him because he was the one who invented it. Who else would be more suitable to be a consultant to guide you on how to obtain this license than the person who designed it himself? So, he made a lot of money by opening a consulting firm.

So you see, this American thing, the power-money exchange, has existed since ancient times. It has always been a commercial society, right? That's why I say the narrative in the stock circle that thinks USDT is non-compliant and won't succeed in the future, while USDC is compliant and can take over the market share, that narrative doesn't hold.

3. Circle and Coinbase: Inextricably Linked

Hazel: You just mentioned that currently, Coinbase is the most obvious partner of USDC. This is also one of the topics we are going to discuss next. In Circle's prospectus, it has made it very clear about its relationship with Coinbase. This partnership has significantly influenced Circle's net profit. Although its revenue is around $16 billion, after deducting various expenses, the net profit is only slightly over $1 billion.

Zheng Di: This protocol is actually quite disadvantageous to Circle. The fundamental structure of the revenue-sharing agreement is as follows: Most of Circle's revenue comes from the interest on its reserve. This reserve can only be invested in U.S. Treasury bonds maturing within 93 days, repurchase agreements maturing within 7 days, demand deposits in banks, and money market funds investing in the aforementioned three asset classes.

However, many people do not actually understand the details of the Genius Act and mistakenly believe that a stablecoin can be invested in money market funds similar to those before the 2008 Lehman Crisis. In reality, ordinary money market funds usually hold longer-term bonds, such as 10-year Treasury bonds, and even assets like CDOs. When a run occurs, the mismatch between the asset duration and liabilities can trigger a liquidity crisis. However, the Genius Act clearly states that the reserve funds must be invested only in those three short-term assets. Having even a tiny amount of a 10-year Treasury bond, for example, would not count as compliant reserve.

Many traditional researchers may not have carefully read the Act and instead rely on experience and assumptions to analyze stablecoin risk, which can easily lead to misjudgment. 85% of Circle's reserve is managed by BlackRock and has established a Circle Reserve Fund, mainly invested in the three aforementioned short-term assets with an average duration of only twelve days; the remaining 15% is held in a bank's demand deposit account. Although this approach is conservative, it can achieve an annualized return of over 4%.

Almost all of Circle's revenue comes from this interest income rather than charging user fees. The issue is that it does not return this interest to holders of the stablecoin but rather pays it to promoters, such as Coinbase. This is essentially an indirect profit-sharing mechanism.

The revenue-sharing agreement between Circle and Coinbase follows a "three-step" structure. Many people believe that Coinbase takes 50%, but this is not entirely accurate. In actuality, Circle allocates 60% of its revenue as promotional fees, of which about $900 million goes to Coinbase, and an additional $60.2 million goes to other platforms like Binance. In other words, out of Circle's $1.6 billion revenue, apart from promotional costs, Circle is left with just over $600 million. Out of this amount, over $500 million is for its own management and operating expenses, and after deducting taxes and other expenses, the final net profit is around $161 million.

Coinbase takes over 56% of Circle's revenue, but its platform only holds an average of 22% of USDC reserves. This disproportionate revenue share compared to its actual market share is due to the favorable nature of the revenue-sharing mechanism. Specifically, the first step of this revenue-sharing agreement is to determine the "payment basis," which is essentially equivalent to Circle's interest income. Circle first deducts 0.1% to 1% from this amount for operating costs, and the remaining portion enters the "product revenue share" phase.

At this stage, Circle and Coinbase will split the revenue based on their respective daily average holdings of USDC on the platform. If Coinbase's USDC share on the platform is 22%, they will take this portion of the revenue; if Circle's share is 6%, they will take 6%. The second stage is the "ecosystem revenue sharing." Coinbase takes 50% of the remaining revenue, Circle takes the other half, and Circle may still need to continue paying other partners. Overall, Coinbase actually takes 56% of Circle's total revenue.

Why would Circle agree to such a disadvantageous agreement? The reason dates back to 2018. At that time, USDC was jointly launched by Circle and Coinbase, establishing a joint venture called the Center Consortium, with each party holding a 50% stake. However, by 2023, in order for Circle to pursue an independent IPO, it was necessary to untangle Coinbase's ownership. So, using its 8.4 million shares, worth over $200 million, Circle repurchased Coinbase's 50% stake in Center. The transaction was valued at $25 per share and has since seen its market value increase substantially.

In exchange, Circle signed two partnership agreements:

· Master Partnership Agreement: Signed in August 2023, with a term of three years. If, after the agreement expires, Coinbase achieves the KPIs for "Product Revenue Sharing" and "Ecosystem Revenue Sharing," they have the right to automatically renew for another three years, with unlimited renewals thereafter.

· Ecosystem Partnership Agreement: It stipulates that Circle and Coinbase must mutually agree if they intend to introduce new ecosystem partners. This means that Circle is effectively deeply integrated into Coinbase's ecosystem and cannot independently expand ecosystem resources.

The agreement also includes a "Legal Barriers Exit Clause": If future regulations prohibit Circle from paying referral 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 designed to guard against potential future regulations that could prohibit the indirect payment of interest to referral partners. For example, if users hold USDC on Coinbase and earn a 4% return, this interest is essentially paid by Circle to Coinbase, who then transfers it to users. If future laws prohibit this indirect rebate mechanism, Circle must cease paying referral fees.

It can be said that Coinbase and Circle are very "sophisticated" in protocol design, almost considering all potential legal risks and locking Circle fully into their own system through the protocol terms. Circle is not just a partner anymore but more like a "sub-ecosystem unit" of Coinbase.

Hazel: So basically, this is a sell-out agreement, right?

Zheng Di: Yes, I have also studied the structure of this agreement. If Circle has no legal obstacles but refuses to pay the revenue share, what can be done? In fact, there is no arbitration mechanism in the agreement. However, because the agreement is governed by New York State law, Coinbase can totally file a lawsuit in New York. If Circle fails to comply with the agreement, I think in most cases, they would lose the case. The court is likely to support the continuation of the agreement, and even if Coinbase is firm enough, they could directly demand that Circle hand over the trademark and intellectual property rights. In that case, Circle would basically have no way out of this agreement.

4. A Perspective on Coinbase's Risks and Opportunities

Hazel: You just mentioned the 4% interest rate. In fact, the current interest rate that Coinbase offers to users for USDC deposits is not just 4% but has been subsidized to an annualized 12%. This level is already at a "too good to be true" extent. When Chinese users see a guaranteed return of over 10%, many people's first reaction is "is this a scam?" But in reality, is this to meet the renewal conditions in the partnership agreement with Circle by increasing the USDC yield to attract users?

Zheng Di: That's a great question. Although many people think these two partnership agreements are undisclosed, they are actually included in Circle's prospectus as attachments. It's just that the specific data details are not disclosed. According to U.S. securities regulations, significant partnership agreements of public companies, key personnel hiring contracts, etc., must be made public. Returning to the agreement itself, for Coinbase to obtain the "unlimited automatic renewal right" of the agreement, two conditions must be met:

1. Product revenue sharing KPI must meet the target;

2. Ecosystem revenue sharing KPI must meet the target.

The threshold for ecosystem revenue is relatively easy to understand, such as Coinbase must continue to support USDC trading pairs, USDC's main chain deployment, compatibility with official wallets, etc. Whether there are any platform exclusivity requirements is currently not clearly disclosed in the agreement. The KPI for product revenue sharing may have set a minimum threshold, for example, the platform must hold a certain proportion of USDC, but the specific amount is not publicly disclosed.

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

First, the protocol stipulates a yearly increasing KPI threshold. To meet this target, Coinbase must spend money to attract more USDC deposits;

Second, even without a mandatory threshold, Coinbase also knows that the more USDC on its platform, the more revenue it will receive. Anyway, these subsidies are paid by Circle, so Coinbase has no cost pressure and naturally wants to promote this.

As for why Coinbase offers a high 12% interest rate on USDC deposits, I believe their strategy has shifted. Previously, they focused more on attracting spot users and directing funds to U.S.-based trading platforms. But now, after the ETF launch, U.S. retail investors can invest in BTC, ETH through ETFs without having to buy on Coinbase, with much lower fees.

Coinbase's market maker trading fees are usually only between 0.12% to 0.16%, and ETF fees are estimated to be similar, so Coinbase's spot transaction fee revenue faces downward pressure. Currently, over 64% of Coinbase's revenue comes from "altcoins," with XRP and Solana contributing the most: XRP accounts for about 18%, Solana accounts for 10%, totaling about 28%. If XRP or Solana launch an ETF in the future, these transaction fees will also be impacted.

So, the market may not realize a practical problem: the more ETFs there are, the harder Coinbase's spot business becomes. If the U.S. introduces over 40 crypto ETFs in the future, Coinbase's local spot business will almost lose its competitiveness. What is Coinbase's way out? I believe it lies in two directions:

1. Offshore Market (Coinbase Global): Currently, it only accounts for 20% of its total revenue, but has enormous growth potential;

2. Derivatives Business: Untouched by ETFs, competition is not as fierce. Coinbase's recent acquisition of Deribit is a key step in this direction.

From a strategic perspective, acquiring Circle is not cost-effective. Because Circle can no longer escape protocol constraints, Coinbase has already gained great benefits in the protocol, so there is no need to buy the entire company at a high price. They just need to continue to extract Circle's profits. Therefore, Coinbase is no longer focusing on how to "fleece spot users" but is shifting its focus to offshore accounts and derivative trading. For example, this 12% interest rate subsidy is not for all users but is concentrated on Deribit accounts or Global users. Initially, the subsidy threshold was low, such as no deposit amount limit, but later, due to a large number of Chinese users flooding in, it quickly decreased to a single account limit of 1 million USDC, and now it is only 100,000 USDC.

However, some "carpet farmers" can achieve a $1 million limit by performing multiple KYC checks and multi-account operations, such as using 10 accounts, and can also enjoy a 12% annual interest rate. Nevertheless, Coinbase's core lies in the "conversion rate": you deposit money, it may not be traded immediately, but there will always be a portion of people who will trade. As long as this portion converts, it has recouped its costs.

5. "Genius Bill" and the Future of Stablecoins

Hazel: A few days ago, I read Artemis's report, where they analyzed a $240 billion stablecoin market. The report began by pointing out a trend: the stablecoin industry is shifting from an "issuance-oriented" approach to a "distribution-oriented" one. It's becoming increasingly difficult for issuers to sustain profits, and channel capacity is beginning to emerge as a core competitive advantage. This also brings up the issue we discussed earlier about USDT and USDC, particularly after the introduction of the stablecoin bill. Everyone is now pondering: What kind of impact will various stablecoins face after achieving compliance? For example, given the backdrop of significant institutional entry into the compliance space, can Tether maintain its leading position?

Zheng Di: I believe the answer depends on the final version of the "Genius Bill." Many people mistakenly believe that the Democratic Party opposes stablecoins while the Republican Party supports them, but that's not the case. When the FIT21 bill passed the House of Representatives this year, 71 Democrats also voted in favor. This indicates that promoting stablecoin development has become a bipartisan consensus. Even Elizabeth Warren, who is seen as highly anti-crypto, publicly stated that stablecoins could develop into a $2 trillion industry in the next three years and strongly support the global dominance of the U.S. dollar. She opposes the "Genius Bill" mainly for two reasons:

First, the issue of corruption remains unaddressed. She criticizes that while the bill amendment prohibits senior government officials from engaging in stablecoin business, it does not bar individuals at the level of the President or Vice President, raising concerns about the issuance of USD-1 stablecoin for the Trump family.

Second, the bill lacks effective regulation for offshore stablecoins (especially targeting Tether).

I have also mentioned before that USDT (Tether) currently generates most of its profits from the 18% "non-compliant assets" part. This includes around 100,000 bitcoins, 50 tons of gold, and investments in Bitdeer—not many know that Tether is currently the second-largest shareholder of Bitdeer, holding a 25.5% stake.

Furthermore, it also holds a 70% stake in a sugar company in Argentina called Adecoagro. Many are unaware that Tether is currently one of the largest lenders in the entire Web3 industry, with a total debt of around $8.8 billion. In addition to this, it has other forms of investments and revenue streams.

If the final Genius Act does not impose strict extraterritorial jurisdiction on offshore stablecoins, Tether's offshore model could continue to exist, enjoying arbitrage opportunities. It could even launch a compliant version of a stablecoin in the United States as a "window dressing," while continuing its main offshore business model to make money.

Therefore, we may see the following scenario: the offshore market remains Tether's "comfort zone," while in the onshore market, it has no advantage in terms of compliance and licensing. For example, in Europe, Tether has not obtained the relevant licenses under the Markets in Crypto-Assets Regulation (MiCA) and has therefore been delisted. In contrast, USDC can still operate in the European market, including some stablecoins that have obtained MiCA approval, and can continue to participate in traditional payment scenarios.

However, it is worth noting that the trading scene in Europe itself does not offer much profit potential. We can see this from the example of Bitstamp: this veteran European exchange platform founded in 2011 was eventually sold to Robinhood for only $200 million, which was quite unexpected. This also indicates that the trading business in Europe has "little room for maneuver," and even with compliance, its significance is limited.

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

Just look at the limitations of other stablecoins on the market:

· PayPal's PYUSD was seen as a big deal when it was launched. However, it currently has a circulating supply of only around 800-900 million US dollars, and I suspect a significant reason is the reluctance to pay promotion fees;

· USDC has a circulation of 61 billion US dollars, but the cost is that it has allocated about 60% of its revenue to pay for promotion fees, essentially following an extremely capital-intensive growth model;

In contrast, Tether has completely taken the opposite approach, not only refusing to pay promotion fees but actually charging a 10 basis point fee to partners. Tether's rationale is: I provide you with open APIs, allow you to mint and redeem, and support you in market-making, which is already a way of "giving money," so you should pay me instead. However, another scenario cannot be ruled out: if Warren's insistence and the voices of some Democratic lawmakers ultimately lead to the addition of strict provisions regarding offshore stablecoins in the bill, completely blocking the space for "regulatory arbitrage," then Tether's existing model will be difficult to sustain. Therefore, the ultimate key still depends on the regulatory attitude. Will regulators truly impose penetrating restrictions on offshore stablecoins? This is the fundamental factor that will determine the future landscape.

6. The Two-Stage Rocket Development of Stablecoins

Zheng Di: I have always believed that the future development pattern of the stablecoin market can be described as a "two-stage rocket." In the first stage, it will be driven by traditional financial institutions, mainly including major banks, card networks (such as Visa, Mastercard), and payment companies (such as Stripe, PayPal). The applications in this stage will focus on the payment field, especially in areas such as cross-border transactions, cross-border payments, import and export trade, and commodity settlements.

In fact, Tether (USDT) has already entered the field of trade finance for commodities, using stablecoins as a financing payment tool. This type of application is expanding rapidly and is a significant breakthrough in stablecoin development. Many people ask me, "How is it possible to reach a $2 trillion stablecoin scale by 2028?" I believe that the main path to this goal is not through "trading scenarios" but through payment scenarios. What we currently refer to as a "promotion fee" model is more used in trading platform scenarios. In other words, stablecoin project teams pay fees to platforms, wallets, and other channels to promote user adoption, but this is a distribution strategy oriented towards transactions.

However, in the future, a similar promotional logic may also appear in payment scenarios — for example, the issuing party subsidizing payment institutions, banks, or corporate clients. This promotional method for this kind of scenario is not yet fully mature, but I believe it will quickly be established because the competition will be fierce. This is the first stage of the "two-stage rocket": growth driven by payments led by traditional financial institutions, accelerating the rapid expansion of the stablecoin scale.

In the second stage, it depends on when the U.S. SEC (Securities and Exchange Commission) will formally relax the issuance threshold for security tokens (STOs) and significantly simplify the compliance process. In fact, the SEC's new chairman, Gary Atkins, stated publicly about a month ago that he will push in this direction. I believe that this is likely to be implemented within the next two years. Once STOs are widely opened for compliance, the era of everything being on-chain will arrive. By then, not only crypto assets but also traditional securities, bonds, funds, and all financial assets could potentially circulate and trade on-chain in tokenized form.

During this process, on-chain transaction demand will once again significantly increase, and stablecoins, as an essential tool for on-chain payments and settlements, will experience a second wave of explosive growth. Furthermore, as Michael Saylor mentioned in February of this year, the total market value of stablecoins is expected to reach the $10 trillion mark in the future, which is not an impossible dream.

Hazel: But I wonder, is it really that easy to break user habits and network effects? For example, even though Binance spent a lot of money promoting BUSD in the past, it was not particularly successful in the end. Circle has been connecting with numerous partners for years, driving regulatory communications, and opening up channels. Can these accumulations really be easily surpassed by newcomers?

Zheng Di: What you said makes a lot of sense, but it also depends on the perspective from which you view the primary use case of stablecoins. If you think stablecoins are mainly for 2C (consumer-facing) purposes, then indeed, gaining user mindshare is challenging, and the barrier to entry for newcomers will be very high.

However, we are now entering a new phase: stablecoins are becoming legalized, brought into the light, and gradually entering the payment scene. Looking at the current circulation of stablecoins, most are still used in transaction-related transfer scenarios, and the proportion of true "pure payment" usage is relatively small. Although we hear about some offshore payment cases, such as Russia settling oil sales in some way, the scale of this gray path is ultimately difficult to compare with the global compliant financial system.

What is rapidly growing now is the legitimized cross-border payment scene. The demand in this area is real, and the number of participants is increasing. More importantly, the payment scene is primarily 2B (institutional, platform, enterprise-level) rather than 2C. You can think of stablecoin payments as a kind of "underlying payment technology." It changes the backend, not what the user sees on the front end.

For example, what you see when you swipe your card might still be VISA, MasterCard, Apple Pay, etc., but the underlying clearing and settlement technology can already be replaced by stablecoins. Companies like Bridge that build on-chain payment infrastructure can sell for $1.1 billion, 100 times PS, precisely 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. In this architecture, user unawareness is the most significant advantage. When you change the underlying system, users do not need to be re-educated. It is precisely because of the 2B scenario that the replacement and competition of stablecoins in these fields are less challenging. Business cooperation often depends more on benefit exchange, such as how much promotion fee you are willing to share.

Suppose I am Meta, with a vast ecosystem. You want me to integrate your stablecoin system within the platform; then it's "Mark Zuckerberg's call." Most of Meta's users have no clear understanding of "stablecoins." They only know they receive rewards, payments, or settlements on Facebook or Instagram but are unaware of the underlying asset. It is for this reason that I believe in the next 1-2 years, the payment scene will be the most critical breakthrough for stablecoins. In comparison, the significant expansion of transaction scenarios will wait until the STO (Security Token Offering) process is truly simplified, and when everything is on-chain, that's when the demand for the on-chain financial ecosystem will be revitalized.

7.  Big Tech Companies and Stablecoins

Hazel:  Earlier, we talked about Meta, and I've always had a question. According to the Genius Act, the issuer of a stablecoin should be considered a "financial institution," right? But Meta is a tech company. So, can it not issue the stablecoin itself, but instead have it issued by another entity with a financial license, while Meta handles its use and distribution? Or can Meta establish a financial subsidiary to issue the stablecoin, thus "circumventing" the entity identity restriction?

This question came up in a discussion I had this morning. They asked: Meta is so big, why not just acquire a bank and have the bank issue the stablecoin? On the surface, it sounds reasonable, but I would say: If it were that simple, Meta would have done it a long time ago. Why does it not issue the stablecoin itself but instead go to Instagram for a pilot and collaborate with external stablecoin projects? This indicates that the issue is not that straightforward. The core reason is likely that the Genius Act applies "penetrative regulation" to "big platform-type tech companies." In other words, regardless of whether you own a bank, establish a subsidiary, or find concerted action, if regulators see this as substantive Meta control or involvement, it will still be restricted.

In other words, even if you use a front company to issue the stablecoin, even with a financial license, if Meta is actually pulling the strings behind the scenes, it may still face restrictions. The Genius Act may be drawing a clear line: tech platforms cannot directly control stablecoin issuance. Of course, it is also possible that the regulatory framework has not yet been fully implemented, and even Meta is taking a wait-and-see approach. They do not know if the new rules will actually extend to subsidiary companies, indirect shareholders, and similar operations. But from the current perspective, "not getting directly involved and just collecting promotion fees" may be a more prudent choice for Meta.

So, I believe Meta is not unable to do it but rather does not need to. If you truly go ahead and issue a stablecoin, you have to accept regulation as a financial institution. For a tech 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 the stablecoin as a means of payment or interaction into its platform and let others bear the compliance, regulatory, and clearing risks.

I have always said that Web3 is increasingly resembling the internet. In the end, it is "scene-oriented, traffic-oriented," rather than who controls the infrastructure. Look at all these public chains, stablecoins, clearing systems - technically, anyone can do it, but those with real scenarios and users are the core of value. If Ethereum is too expensive, I'll go for a chain like Aptos that is not widely used but inexpensive; if TRON is too slow, I'll switch to another chain. Platforms like Meta, with immense distribution capabilities and user bases, do not need to personally take the plunge into the regulatory arena.

8. Financialized Stablecoin or Tokenized Money Market Fund

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

Zheng Di: My assessment is that these types of stablecoins may always remain a niche market. Based on current legislation in the United States and Hong Kong, the future path for these interest-bearing stablecoins to become "sunshine compliant" is very challenging. Although figures like BitMEX founder Arthur Hayes publicly support this model, in reality, regulators take a highly cautious stance toward these 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 difficult for them to enter the mainstream financial system.

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

Why? It's simple. In the on-chain financial environment, especially in scenarios such as market making, leverage trading, and clearing, stablecoins themselves are non-interest-bearing assets. If you use a stablecoin as collateral, there is no interest income during this period. However, TMMFs are different; they are essentially money market funds that generate annualized returns as long as they are used as collateral. For large-scale funds and active leverage on-chain market makers, this interest income is a very important source of revenue. Therefore, many on-chain market platforms and liquidity pools have gradually begun to accept TMMF as collateral assets instead of stablecoins.

This actually means that stablecoins are no longer the only "base currency" choice in the on-chain financial scene. Moreover, if TMMF products in the future can achieve high-frequency settlement, such as daily settlement, and even further bridge the exchange channels between TMMFs and stablecoins, then they may also have payment functions in some B2B payment scenarios, especially in areas such as large-scale cross-border transactions, enterprise settlements, supply chain finance, and other fields. These are not scenarios where end consumers use them to buy coffee, but rather enterprise-level bulk settlements. In these applications, interest income and settlement efficiency are more important than the "payment experience," so TMMFs may occupy a place in these scenarios in the future.

9.  The Evolution and Status Quo of the Legacy System

Hazel: We just mentioned Visa and Mastercard as well. As global card networks, they hold significant influence in the cross-border payment sector. Circle itself has a network called CPN. I am curious, what will be the future relationship between this CPN network and Visa and Mastercard? Especially, if as you mentioned, Visa and Mastercard themselves will drive change in the future, is it possible that they might directly encroach on a portion of the stablecoin market?

In fact, Visa has already started dabbling in stablecoins. They have invested in a UK-based stablecoin payment service company called BVNK through Visa Ventures. This company is led by Horn Ventures, which you should be familiar with; Horn's founder was the former SEC legal lead and later founded a VC, a16z, which became its largest LP. Horn Ventures is now also a well-known investment institution in the United States. This funding round also had participation from Coinbase and Tiger Fund.

BVNK primarily provides stablecoin solutions for LianLian Pay's European division. In Visa's recent quarterly earnings call, they also specifically mentioned that they have processed approximately $300 million in stablecoin payments. Of course, this number is negligible compared to Visa's overall transaction volume, but it shows their experimentation.

In reality, stablecoins do pose a challenge to Visa and Mastercard. I have previously conducted a rough quantitative analysis. The main revenue structure of Visa and Mastercard is roughly: 60-65% from card transaction fees, 35-40% from value-added services. The most core competitive advantages lie 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 KYC and AML be avoided? I think it's unlikely. Therefore, Visa and Mastercard may still be able to rely on service fees through KYC/AML interfaces in the future. They can act as globally recognized KYC/AML API providers and, even if not the main players in transactions, collect "toll fees."

That is to say, whether it's Circle, Tether, or other stablecoin companies, they will ultimately need to access a trusted large-scale compliance interface. Visa and Mastercard are likely to play this role. In scenarios with high KYC/AML requirements, their service value still exists. However, they may face some impact in scenarios with low KYC requirements.

My judgment is that the gross margin of Visa and Mastercard may decrease by 5 to 7 percentage points, and the total revenue may be impacted by 20% to 30%. However, their core business should not be greatly affected. At the same time, they must embrace this trend; otherwise, they will be squeezed out by new players. They also need to actively participate in rulemaking, especially around open compliance interfaces.

However, so far, we have not seen any substantial actions from Visa and Mastercard in stablecoin infrastructure. Currently, the more active participants are banks and local payment networks like Zelle and Singapore's PayNow, which are looking to issue their own stablecoins.

Circle's CPN network is indeed technically advanced, with capabilities such as cross-chain instant payments, and it is user-friendly in terms of user experience. However, from an investment perspective, what is more important is whether it can generate actual revenue. Investors are more focused on use case promotion and monetization capabilities. The two core use cases of stablecoins are trading and payments. I believe that at least in the "sunshine" scenario of payments, the current focus is still on the "integration" path rather than a complete revolution.

In other words, the current strategy is about how to embed into the existing financial system, replacing some intermediaries and channels. This is why cross-border payments have become a key breakthrough direction. Card networks, payment institutions, and banks all have issues with SWIFT. Many participants now hope to bypass SWIFT and establish their own network. The U.S. government is also willing to participate in regulation as long as it can still control KYC/AML. Therefore, SWIFT has become a relatively weak link. The promotion of stablecoin payments now is an attempt to cut a piece out of the traditional financial system and embed it, rather than overthrowing and rebuilding it. I believe this approach is feasible and can develop rapidly.

Once the U.S. "Genius Bill" is passed, the biggest drivers may be banks and payment institutions, and even card networks may join. However, currently, the most active participants are Stripe and several large banks. On the contrary, small and medium-sized banks may face significant challenges, especially those heavily reliant on savings and loan and card issuing profits.

The U.S. Treasury's Advisory Committee (TBAC) has put forward a viewpoint: if the Genius Bill is passed, there may be a "relocation" of deposits of up to $6.6 trillion. However, large banks are not concerned about this because they can issue their stablecoins and have diversified businesses for hedging, but the most vulnerable are small and medium-sized banks. Once they lose their savings, they lose their credit creation ability. Additionally, many small banks rely on card issuance commissions. Once this piece is also replaced by stablecoins, they may find it difficult to survive. This means that after the bill is passed, it may trigger widespread closures of small and medium-sized banks in the U.S.

Hazel: This reminds me of the central bank digital currency (CBDC) discussions a few years ago. People were concerned that a central bank digital currency issuance would lead to the "disintermediation" of commercial banks, which is a similar logic. However, central bank digital currency issuance didn't go through, but stablecoins might actually cause a similar outcome, especially for small and medium-sized banks.

Zheng Di: That's correct, but I believe that we will definitely see the emergence of on-chain banks. In the future, large banks may discover 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 instead of immediately converting them to fiat currency, and the circulation scale of stablecoins will expand.

Currently, most on-chain lending protocols are collateralized loans, with Bitcoin as the main collateral, a 64% loan-to-value ratio, and an 8.5% interest rate. This business is essentially catering to "wealthy people's loans." Why is there a lack of unsecured loans? It's because of the absence of a credit scoring system like FICO. However, if traditional importers and exporters are willing to settle in stablecoins, have a robust credit rating, on-chain unsecured loans can be made possible. Banks will also realize that issuing and attracting deposits in stablecoins for lending can be profitable, which could lead to the emergence of "stablecoin banks."

Therefore, indeed, small and medium-sized banks may "lose their intermediation," but credit derivatives will not disappear; they will just take on a different form with a new group of players. Traditional research often states that financial disintermediation will weaken the ability of credit derivatives, but I don't entirely agree. The path of credit derivatives may change, and the participants will change.

Jeremy Allaire, Founder of Circle: A Story with China

Hazel: We just talked about some of the investor information disclosed in Circle's IPO prospectus, including investment institutions from China, such as IDG Capital and Huaxing Capital. This actually surprised many people—because a lot of people didn't know that Chinese capital had invested in Circle early on, and this investment now seems to have yielded extremely lucrative returns. In less than ten years, the returns could reach over a billion US dollars, making it a classic case in the venture capital field. So the question is: How did this Chinese capital enter Circle?

Zheng Di: In fact, it's not that complicated. A decade ago, the crypto industry was a time when Chinese capital was very active. From USDT's origin in Hong Kong to Ethereum and other early public chain projects, there was significant Chinese participation behind the scenes. Chinese investors themselves were key players in the early Web3 trading markets, and the mining circle also accumulated substantial funds, with many mining bosses participating in early equity financing. Additionally, at that time, Chinese VCs were in the peak of the mobile internet dividend, had ample funds, and were keen to explore this new direction of Web3 as well.

Circle's CEO Jeremy Allaire actually paid great attention to the Chinese market at that stage. He not only built a local team but also visited Chinese regulatory agencies multiple times, engaging with the central bank, research institutes, and others. At that time, he clearly hoped to introduce the USDC or stablecoin concept to China and promote local cooperation.

Hazel: I also have some personal interactions with Jeremy that I can provide a bit of a personal perspective on:

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 saw him was at a closed-door seminar. This was after the Libra incident, and stablecoins had become a policy discussion focus. At that time, while I was still working at Caixin, we organized a weekend meeting where the head of the central bank's digital currency research institute, Wu Jihan from Bitmain, and others attended. I happened to facilitate Jeremy's participation in this small closed-door meeting, and he must have come specifically from overseas, showing up at the office on a weekend. He still held expectations for involvement in China and regulation acceptance.

The third time was in Davos in 2022. Due to the impact of the pandemic that year, the winter meeting was moved to May and became the only Davos meeting "without snow." Circle was one of the main sponsors that year, and I could see their large ads as soon as I arrived at the station. We met again, but this time, he was not talking about China at all; instead, he focused on U.S. compliance policies and stablecoin legislation. At that time, the "Stablecoin Act" draft was being discussed in the U.S. Congress.

The biggest impression these exchanges left on me was that he was really persevering on a very steady path. In a cryptocurrency industry full of "pirate culture," he insisted on being the "navy," sticking to the compliance route, and truly growing Circle to its current scale. I thought that was a pipe dream at the time.

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

· He originally co-founded Allaire Corporation with his brother in 1995, went public in 1999, reached over $100 million in revenue in 2001, and eventually sold it to Macromedia, which was later acquired by Adobe. He also became Macromedia's CTO, making important contributions to core products like Flash Player. Some of the earliest products they developed at Allaire Corporation 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, which went through explorations in trading platforms, payments, stablecoins, and eventually focused on USDC, officially conducting an IPO in 2025.

In my view, he is a cautious and forward-thinking entrepreneur. In the early days of Circle, despite engaging in diversification explorations such as acquiring a trading platform and developing wallet services, once he identified USDC as the future mainstay, he steadfastly pursued that path. I truly admire his ability to maintain a sense of direction in such a highly volatile and uncertain industry.

11 Circle's Future Possibilities and Limitations

Hazel: Does Circle have any new stories to tell? Apart from the current focus on USDC and the content mentioned in the prospectus, can it expand into entirely new businesses? For example, as you mentioned earlier, albeit within regulatory constraints, Tether has already ventured into commodity payments. So, can Circle also expand into similar scenarios? Or even explore integration with emerging fields like AI, or promote new currency products like the Euro Stablecoin? How do you envision the future of stablecoin companies?

Zheng Di: I think expansion is certainly possible, but the main issue is whether there is enough capital. Why can Tether enter the commodity scene? Because it is really engaging in lending. We must understand that although there is demand for stablecoin payment scenarios, compared to financing scenarios, the essential nature of these scenarios is not as strong. Especially in the case of credit for buyers or sellers—if you can lend me money, that's a game-changer.

Tether's strategy is to leverage funds for these scenarios. Its total loan amount has reached $8.8 billion, with approximately $14 billion in proprietary capital investments, along with some other investments, resulting in an overall external investment and loan size of about $30 billion. In an offshore state, by continuing to be "non-compliant," this $30 billion "checkbook" can easily drive stablecoin usage, especially in commodity scenes. Essentially, it is no longer just a stablecoin company but a stablecoin + banking model.

In this scenario, leveraging loans to drive stablecoin payments is much easier. However, Circle cannot achieve this because it lacks lending capabilities. If it can only convince others to use USDC through business development (BD), that's quite challenging. Unless there are major buyers like the Trump family willing to fully adopt USDC, it's hardly possible. But fundamentally, what they seek are resource relationships, such as establishing a connection with the Trump family.

Another example is Ant Group promoting an RWA project in Hong Kong. Buyers are willing to participate, to some extent, also to establish a cooperation with Ant Group. This demonstrates that scenario is not primarily driven by payments themselves, but by credit capability. Tether binds lending and payment scenarios together: lending with USDT, and receiving payments in USDT as well. You have to accept it because the financier holds the power.

On the other hand, Circle's biggest issue is the lack of this "checkbook," unable to dominantly control the scenario, and having limited resources. Most of its money needs to be invested in promotional expenses, and it must also comply with regulations, unable to earn excessive profits. Therefore, from a business perspective, its story seems rather mediocre, only able to gradually accumulate based on industry dividends.

In comparison, Tether has already started acquiring publicly traded companies. For example, it acquired the Argentine company Abaco Agro, which not only has business in commodities and agricultural import and export, but also participated in an agricultural blockchain project as early as 2017, holding a 10% stake. This indicates its high acceptance of blockchain and crypto, allowing Tether to integrate these resources. Behind this are capital strength, unrestricted regulatory constraints, and the dividends brought by the first-mover advantage.

A deep dive into research will reveal that Tether and Circle are fundamentally not the same species. If Circle lacks the ability to control the field, it must then "cling to the thigh." The scenarios that Coinbase can provide are also limited. We can even pose this question: three to five years from now, when the profits and market value of Robinhood and Coinbase are similar, who will win? Most people may choose Robinhood because of its broader user base and more scenarios. Robinhood has also acquired Bitstamp, expanding into the European market.

So Coinbase's biggest issue is insufficient scenarios and users, and it may even be losing them, especially in its spot business. Therefore, when I say Circle failed to cling to the thigh, it is not just a matter of political resources but also includes business resources. For example, after Stripe launched USDB, it became an important partner for Bridge and exchanged equity. There are also banks, card organizations, payment companies, and bulk commodity traders in China; all of these are important partners.

All these factors may lead to the widespread use of stablecoins. What Circle needs to focus on now is how to penetrate these scenarios and whether it can introduce a strategic major shareholder.

In addition, China should now realize that the competition between the digital renminbi (CBDC) and private stablecoins has already yielded clear results. In fact, a more effective path is to allow private companies to issue stablecoins, with the government conducting strict supervision, KYC, and anti-money laundering controls, and then promoting these stablecoins overseas. This "soft control" model is actually superior to the government-led CBDC model. This is why more and more people are now calling for the issuance of offshore RMB stablecoins. Dr. Shen Jianguang of JD.com specifically wrote an article pointing out: China cannot be absent from this track.

In the future trade and commodity payment scenarios we envision, the competition among stablecoins will not only involve the U.S. dollar but will also extend to Euro and Renminbi-based stablecoins. One thing to consider is: Who is the most important player globally in commodity and goods trade? Not the United States, but China. While the U.S. excels in services trade, China is an absolute powerhouse in physical goods.

If in the future, China promotes offshore Renminbi-based stablecoins and Chinese companies stop using USDT or USDC in favor of a Renminbi-based stablecoin, it would pose a significant challenge to existing U.S. dollar stablecoins. Therefore, I believe the future of this race is promising, but the competition will be fierce.

On the technological innovation front, the space is somewhat limited. For example, the barrier to entry for AI is not very high, and currently, the direction of AI Agents does not seem easy to break through. Major AI model companies have started to build their own agents instead of just providing basic models. Those who were excitedly starting AI Agent businesses last year now realize that their advantage is diminishing as major model companies directly enter the scene. Thus, from a technological standpoint, the barrier is not that high, and the real value lies in the use cases and users. If Circle were to stray from its core business and pursue flashy directions, it might encounter issues. It should focus on its core business and cultivate it deeply.

As for the possibility of future non-dollar stablecoins, I believe the most promising ones are Euro-based stablecoins and offshore Renminbi-based stablecoins. Many countries around the world are already heavily dollarized, with regions like Latin America, Africa, and Turkey widely using dollar-based stablecoins. If China and Europe do not push for their own stablecoins, they will fall behind in the new financial order. Therefore, I do not think they will allow a stablecoin company controlled by the United States to take on the task of issuing non-dollar stablecoins.

Hazel: Here's another example, suppose Meta uses USDC, what would happen?

Zheng Di: If Circle successfully integrates with Meta, making Meta its strategic shareholder, that would be a crucial breakthrough. Actually, Circle and BlackRock already have a similar agreement. During the agreement period, BlackRock is the sole manager of the Circle Reserve Fund, which may manage assets worth billions of dollars. In exchange, BlackRock cannot issue stablecoins on its own or support other stablecoins, only USDC. Through this approach, Circle essentially "binds" BlackRock.

So, can Circle bind with Meta in a similar way? By binding with a major tech company, fully integrating into its ecosystem rather than simply cooperating, such as Meta using USDC today and potentially using USDP or USD1 tomorrow. Or attempting to collaborate with the Trump camp is also not out of the question. However, if they could secure an exclusive agreement, such as making Meta a strategic shareholder and the exclusive promoter of USDC, Circle's future would be boundless. The question is, does Circle have the capability to facilitate such a binding?

12. Institutional Onslaught: What Investment Opportunities Remain for Retail Investors?

Hazel: As time is almost up for today, let's discuss the final question. With Circle's explosive push towards going public, is this current bull run coming to an end? From the perspective of a retail investor, with so many institutions entering the space, what opportunities are still available?

Zheng Di: I believe there are definitely still many investment opportunities. At this stage, the opportunities mainly revolve around "coin stocks," which are stocks related to Web3. Many Web3 companies performing well today may ultimately choose to IPO or go public through a SPAC merger. Additionally, a large number of Web2 companies will also gradually "add Web3," similar to the past trends of "adding the Internet" or "adding AI." This is because the wealth effect of Web3 in the stock market is just too apparent.

The underlying logic is quite simple: companies leveraging Web3 to reduce costs or increase revenues, as long as the fundamentals are solid, have the potential for significant stock price appreciation. This is an important insight for both public companies, founding teams, and entrepreneurs in the Web3 space. Currently, liquidity and the wealth effect are clearly concentrated in the stock market. From an investor's perspective, the focus should now be on "coin stocks." Once the macro environment becomes more accommodative in the future, attention can then shift to altcoins. At that point, altcoins may truly start their bull run. Fund flows determine market hotspots.

Hazel: Today's discussion has been very engaging, and it feels like we have thoroughly analyzed this topic. Moving forward, we will continue to release more content on topics such as digital currency, stablecoins, cross-border payments, and more. If you resonate with the viewpoints we've shared on the show and believe that this is a vast playing field, then continue to follow our podcast. It should provide you with many insights and may help you discover some noteworthy opportunities. Thank you, everyone!

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