USD Coin: What Is It And How Does it Work?

USD Coin (USDC) is a digital currency backed entirely by U.S. dollar assets, effectively tokenizing the U.S. dollar with a fixed exchange rate of 1:1.

Its value remains stable, earning it the label of a stablecoin. In contrast to the erratic price movements of cryptocurrencies such as Bitcoin and Ethereum, stablecoins are often supported by reserve assets, like the dollar or euro, to maintain their price stability.

What is USD Coin?

USD Coin (USDC) is a digital currency that is backed by real-world assets, making it a stable and reliable alternative to traditional cryptos.

Its reserves are fully backed by U.S. dollars or dollar-denominated assets, which are held in segregated accounts with regulated financial institutions in the United States. These accounts are monitored by Grant Thornton, a reputable accounting firm that provides monthly attestation reports to ensure transparency and accountability.

Wondering how USDC maintains its 1:1 peg with the U.S. dollar? It's a simple process: when you buy USDC using fiat currency, the corresponding amount of fiat currency is deposited and stored as one U.S. dollar, and a new USDC is minted. And when you sell USDC, the equivalent amount of fiat currency is transferred back to your bank account and the USDC is burned.

USDC is compatible with several blockchain platforms, including Ethereum, Algorand, Solana, Stellar, and TRON. This means that it can be used in a wide range of applications, from decentralized finance to online payments.

USD Coin is managed by Centre, a consortium co-founded by Coinbase (COIN), a leading cryptocurrency exchange, and Circle, a financial technology company. The mission of Centre is to create a more connected and inclusive global financial system that empowers everyone to participate in the economy.

How USD Coin works?

Technically, USDC is an ERC-20 token on the Ethereum blockchain, which means it operates on the same platform as many other cryptocurrencies. However, unlike other cryptocurrencies, the value of USDC is pegged to the value of the U.S. dollar. This is achieved through a system of collateralization, where each USDC token is backed by a corresponding U.S. dollar held in reserve.

The USDC token is created when a customer deposits U.S. dollars into a regulated bank account held by Circle, the company that issues USDC. The deposit is then verified, and the corresponding number of USDC tokens is minted and sent to the customer's wallet. These tokens can then be freely traded, transferred, or used for payments, just like any other cryptocurrency.

When a customer wants to redeem USDC for U.S. dollars, they can send their USDC tokens back to Circle, which then burns the tokens and releases the equivalent amount of U.S. dollars to the customer's bank account.

To ensure the stability of the USDC token, Circle maintains reserves of U.S. dollars and U.S. Treasuries in segregated accounts with regulated financial institutions. These reserves are audited on a regular basis by independent accounting firms to ensure that they match the outstanding USDC supply.

In addition, Circle partners with a network of exchanges and trading platforms to facilitate the use and exchange of USDC. These partners are required to maintain similar levels of transparency and regulatory compliance, and to provide regular reports on their U.S. dollar holdings.

Overall, the technical workings of USDC rely on a complex system of blockchain technology, regulation, and financial infrastructure to ensure that it remains a stable and reliable store of value for users.

USD Coin Controversies

The Federal Reserve Bank of New York has raised concerns regarding the stability of USD Coin (USDC) and other stablecoins, mentioning potential runs and collapses as risks that threaten the entire stablecoin market.

The bank fears that the problems faced by a more fragile stablecoin, such as Tether (USDT), could bring down other, more resilient ones like USDC, and that the stablecoin market’s lack of insurance makes it vulnerable to collapse.

The report identifies two types of stablecoins: centralized, where one institution holds all the money that the coins are pegged to, and decentralized, which use complex blockchain systems to obtain fiat currency for payments.

The NY Fed believes that Tether is unstable because it backs stablecoins with commercial paper. If companies cannot repay commercial paper in an economic downturn, Tether could end up with no cash. Tether has recently reduced its commercial paper holdings, but if problems with Tether or another stablecoin convince people that USDC is unstable, it could collapse like TerraUSD did.

How to buy USD Coin (USDC)

How to buy the stablecoin USD Coin. In the following guide step by step we summed up all the steps necessary for buying this crypto. We used Coinbase as an example, since it's one of the main promoter of this crypto.

Open a Coinbase account: Start this process by creating an account on Coinbase by visiting their website, coinbase.com.

👉 Click here to open an account on Coinbase and get a €/£/$10 bonus.

Click on the 'Get Started' button and fill in the required details to create your account.

1. Verify your identity: To comply with regulatory requirements, Coinbase asks every user to verify their identity throught a KYC. You can do this by uploading a government-issued ID, such as a driver's license or passport, and completing a facial verification process.
2. Add funds: Once your account is verified, you need to add funds to your Coinbase account. You can do this by linking your bank account or debit/credit card.
3. Navigate to the USDC page: Once you have funds in your Coinbase account, navigate to the USDC page by clicking on the 'Trade' button in the top-left corner of the screen and selecting USDC from the list of cryptocurrencies.
4. Buy USDC: On the USDC page, enter the amount of USDC you want to buy and select the payment method you want to use (bank account, debit/credit card, or Coinbase wallet). Review the transaction details and confirm the purchase.
5. Transfer USDC to a wallet: After purchasing USDC on Coinbase, it's recommended to transfer the funds to a personal wallet for safekeeping. To do this, navigate to the 'Accounts' page and select your USDC wallet. Click on the 'Send' button and enter the wallet address where you want to send the USDC.
6. Monitor your investment: Keep an eye on the value of your USDC investment by tracking the price of USDC on Coinbase or other cryptocurrency tracking websites.
7. Sell USDC: If you decide to sell your USDC investment, you can do so on Coinbase by navigating to the USDC page and selecting 'Sell'. Enter the amount of USDC you want to sell and select the payment method you want to receive the funds in. Review the transaction details and confirm the sale.

It's important to note that cryptocurrency investments can be volatile and carry risks, so it's essential to do your research and invest wisely. Also, be aware that Coinbase charges fees for buying and selling cryptocurrencies, so make sure to review the fee schedule before making any transactions.

Is USDC a good investment?

It can be challenging to determine if USDC is a good investment or not because its value is pegged to the USD dollar. However, what sets USDC apart from other stablecoins is that it can be used outside the crypto sphere. USDC provides a safe, secure, stable, and private method of purchasing crypto on exchanges, but it also has real-world applications. For instance, Visa announced in March 2021 that people could settle transactions on its system using USDC.

Additionally, Circle, the backer of USDC, is committed to transforming the world's economic system using internet-native technologies. In pursuit of this mission, they plan to become the first stablecoin owner to operate on the New York Stock Exchange through a merger with Concord Acquisition Corp, a publicly traded special purpose acquisition company, in a deal that would value Circle at $4.5 billion.

BlackRock, one of the world's largest asset managers, has also announced a minority investment in Circle, becoming the primary administrator of the network's USDC cash reserves.

While there are risks involved in investing in any cryptocurrency, the potential real-world applications of USDC and Circle's commitment to transforming the global economic system may make it an attractive investment opportunity for some. As always, it's essential to do your research, understand the risks, and consult a financial advisor or professional before making any investment decisions.

USD Coin Pros and Cons

Advantages of USD Coin:

1. ✅ Low price volatility: As a stablecoin, USD Coin (USDC) aims to maintain a stable value of 1 USD per coin, which helps to avoid the price volatility typically associated with cryptocurrencies.
2. ✅ Fully backed by U.S.-regulated reserve assets: USDC is fully backed by reserve assets held in U.S. bank accounts that are subject to regular audits and regulatory oversight, providing greater transparency and security for users.
3. ✅ Can be used as a hedge against inflation: Because USDC is pegged to the U.S. dollar, it can be used as a hedge against inflation, which can erode the purchasing power of fiat currencies.

Disadvantages of USD Coin:

1. ❌ No price appreciation: While USDC's stability may be an advantage for some users, it also means that there is no potential for price appreciation like other cryptocurrencies that experience significant price volatility.
2. ❌ Mix of reserve assets not fully disclosed: While USDC is backed by reserve assets, the exact composition of those assets is not fully disclosed, which can make it difficult for users to evaluate the level of risk associated with holding USDC.
3. ❌ Not immune to U.S. dollar price inflation: While USDC is designed to be stable relative to the U.S. dollar, it is not immune to U.S. dollar price inflation, which can erode the value of both USDC and the U.S. dollar over time.

Bottom line

USD Coin (USDC) is a stablecoin that is pegged to the USD dollar, providing a safe, secure, stable, and private method of purchasing crypto on exchanges.

However, what sets USDC apart from other stablecoins is that it has real-world applications. For instance, Visa announced that people can settle transactions on its system using USDC, and Circle, the backer of USDC, plans to become the first stablecoin owner to operate on the New York Stock Exchange through a merger with Concord Acquisition Corp.

As with any investment, there are risks involved in investing in USDC, and it's essential to do your research, understand the risks, and consult a financial advisor or professional before making any investment decisions.

While the potential real-world applications of USDC and Circle's commitment to transforming the global economic system may make it an attractive investment opportunity for some, it's important to remember that cryptocurrencies, including USDC, are highly volatile and carry risks.

Frequently Asked Questions (FAQ)