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

Original Source: Hazel Hu

@circle's surge to $470 billion was probably one of the most desolate episodes in the crypto community. I asked several friends in the circle, and most either missed out or sold too early. On the other hand, some non-crypto listeners who heard our podcast ended up buying and making money. The most heartbreaking thing is probably not losing money in your own crypto trading but rather missing out while watching outsiders make money.

In the latest episode of @PodOur2Cents and with Dee, the second part of the verbatim transcript on Circle has also been released. The amount of information is immense, so I'll try to share some highlights here, and the remaining content can be found at the end of the article. This article is only for fundamental analysis and does not constitute any investment advice.

【Tether and Circle, Two Different Species】

Dee: Although Tether and Circle are both involved in the stablecoin business, they 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 meeting the conditions of the Geary Act. However, it's worth noting that Tether's primary source of profit comes from this non-compliant 18%.

2. Fund Size: Tether's current external investment and lending scale has reached $30 billion. Although constantly questioned about compliance issues, when a non-compliant company has hitched onto the current Secretary of Commerce, and heavyweights like SoftBank, Masayoshi Son, have boarded their ship, and there's a $30 billion war chest available for use, can't they just smash a compliant path with that money? They definitely can. With money and political clout, that's a hard reality. Therefore, in my view, for Circle to achieve its target valuation of $25 billion or even higher, it will face substantial challenges.

【Is the Crypto-Friendly Bank Narrative Still Relevant?】

Dee: Zhongan talked about what kind of story? Zhongan roughly says, I hold 43% of Zhongan Bank's shares, and I am also one of the Hong Kong stablecoin sandbox experiments for Circle, an early shareholder of Circle, with a single-digit percentage stake, maybe not exceeding 10%. So, first, this part of my Circle asset will be valuable in the future. Second, when Circle, for example, achieves a $500 billion Hong Kong dollar stablecoin scale, most of the funds will be in my Zhongan Bank, and I only need to provide them with a 2% interest deposit. Just telling this story, the value doubled in a week.

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

These three banks didn't need to compete at all; they just took the fiat deposits of these Web3 enterprises and trading platforms, and it was interest-free, at zero interest. Then they used this interest-free money to trade government bonds and mortgage-backed securities, making a spread of 2.5% or more. However, with more and more banks willing to serve Web3 enterprises and trading platforms later, the era of this zero-interest savings concept is long gone.

Of course, AnChain did not tell this story, just mentioning 2%. But there are several issues here. First, in fact, we know that the main bank for the Web3 industry in Hong Kong should actually be Standard Chartered Bank, not AnChain. AnChain is actually a virtual bank; of course, it is more friendly, but it is not a major bank after all. We also know that the receiving bank chosen by Coinbase in Singapore is actually Standard Chartered Bank. Standard Chartered Bank is generally more aggressive and has a better appetite, willing to accept this business, so it is more friendly than other banks. So, in reality, the main bank in Hong Kong also uses Standard Chartered Bank, and it is unlikely that all or most of the coin reserves are held in AnChain Bank.

【The Story Behind the New York BitLicense】

Zheng Di: Those of us deeply involved in the Web3 industry should know what is truly hard to obtain, which is the New York BitLicense. Of course, Circle also has this license, and there are only a total of 20 licenses in the world. However, in reality, you will find that the transaction volume in the state of New York is very, very low. The business you can do with this license is very poor. Every quarter, New York's financial regulatory department publishes reports on this.

But why do people still tirelessly pursue the New York license? Because it is a symbol of strength, it is an endorsement. It's me telling all other states, including the federal government, and all other countries, such as if I have to deal with the Monetary Authority of Singapore, the Hong Kong Securities and Futures Commission, or the Dubai Financial Regulatory Department, or even the Japanese Financial Services Agency. I will tell you, I am one of those with one of the 20 New York BitLicenses, aren't these licenses child's play to me?

Establishing BitLicense actually started back in 2013. At that time, didn't New York State hold a hearing? Then they said, "New York State, you're regulating too strictly. You should loosen up, or else the United States will lose its technological lead in Web3, right?" The idea of BitLicense actually originated from that hearing in '13.

At that time, the host of the hearing was from the New York State regulatory agency, and eventually, the official invented BitLicense. But what's especially funny is that after he came up with this BitLicense licensing scheme, before issuing the first license, he resigned, he took off, he started his own consulting firm. He provided consulting services to all applicants for the license. I guess Circle might have hired him, I don't know, but I guess it should be him because he was the one who invented it. Who else could be more suitable to be a consulting advisor to guide you on how to get this license than the person who designed it themselves? So, by opening a consulting firm, he also made quite a bit of money.

So, you see, in the United States, the phenomenon of influence-peddling has existed since ancient times. It has always been a society driven by commerce, right? So that's why I say, in the stock circle, the narrative that thinks USDT is non-compliant and won't work in the future, while USDC is compliant, and can capture your market share, this narrative doesn't hold water.

· Guest: Zheng Di/Didier, Frontier Technology Investor, Managing the Knowledge Planet "Dots Institutional Investor Community"

· Host: Hazel Hu, Host of the Podcast "Zhi Wu Bu Yan," with over 6 years of financial media reporter experience, a core contributor to the Mandarin Public Goods Fund GCC, focusing on the practical application of encryption.

1. The Wild World of Crypto Stocks

Hazel: Let's start with what everyone is most concerned about, the stock price. I wonder how Mr. Di evaluates Circle's performance in the first two days of trading?

Zheng Di: Regarding Circle's IPO pricing, I think the initial position was relatively reasonable, indeed presenting an investment opportunity. However, I have always felt that there are still many hidden concerns in Circle's model in the long run. So, I don't quite understand how it could skyrocket to 250 billion (Note: As of the publication of this article, Circle has surged to 350 billion USD). Some even told me 800 billion, 1 trillion, right? Actually, I don't have much qualification to comment on this stock price these days because I have been educated by the stock trading community for several days, saying that I should take a long-term view. But in reality, I believe there is a huge information asymmetry and cognitive dissonance between the insiders and outsiders of the industry.

In the cryptocurrency space, we are all accustomed to using USDT and are well aware of Tether's actual strength. Some believe that Tether and Circle, although both engaged in the stablecoin business, are actually two different species. This difference is mainly due to 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 BitLicense regulation. However, it is worth noting that Tether's main source of profit comes from this 18% non-compliant portion.

2. Fund Scale: Tether's current external investment and lending scale has reached $30 billion. Although its compliance has been questioned, when a non-compliant company has already hitched onto the current Secretary of Commerce, and giants like SoftBank and Masayoshi Son have also boarded their ship, with $30 billion in the war chest ready to be deployed, can't they pave a compliant path with that money? They definitely can. Having money and political resources on their side is a hard fact. Therefore, in my opinion, for Circle to achieve its goal of a $25 billion or even higher valuation, it will face a substantial challenge.

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

Zheng Di: The meme craze of the past year and the success of Trump Coin, while a huge personal achievement, may be a tragedy for the entire Web3 industry. It further reinforces the industry's external labeling as a "casino" and drains a significant amount of liquidity. The altseason usually requires a loose liquidity environment, but the Federal Reserve has not yet cut interest rates. Market expectations have shifted from an optimistic forecast of five rate cuts at the beginning of the year to two cuts at the fastest (possibly in September), with former Dallas Fed President Rob Kaplan (currently Vice Chairman at Goldman Sachs) predicting just two rate cuts over a month ago. Some large U.S. buying institutions even believe there will be no rate cuts throughout the year.

In this environment, Bitcoin continues to show strength, with its market dominance staying 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 core Ethereum teams like ConsenSys are pushing for Ethereum's version of "MicroStrategy" (like SBET). During Dubai 2049, everyone was actually discussing that Ethereum cannot be shorted next, wondering if it should be rearranged. I think this refers to the next move by the company ConsenSys with SBET. Because in their initial funding of $400 million, they have already bought over $300 million, right? And then the next step is a $1 billion ATM, will they continue? Of course, it also depends on their fundraising ability and their premium, which is also very important, so watch their operational situation.

In my opinion, which is based on my own observations as well as information from others, the current major themes in the US stock market are: Web3, autonomous driving, robotics, nuclear power and fusion, and quantum computing. When liquidity is relatively good, focusing on these five themes can generally lead to profitable outcomes. This year, we have also seen that the wealth generated from investing in stocks and cryptocurrencies is actually much higher than that from investing in altcoins. Therefore, the resilience of stocks is also better compared to Bitcoin. What I have observed is that many large cryptocurrency holders and mining pool owners have transferred a significant amount of funds to the stock market to invest in cryptocurrency-related stocks.

I have written about a company called Canaan, which is a US-listed mining company associated with Bitmain. Currently, its mining power has reached 32EH. If the next 18EH is added, it will quickly reach 50EH and become part of the premier league of publicly traded miners. Many of the additions to this mining power are from existing miners. There are also some miners who are looking to cash out through the stock market. For example, there is a company that originally adopted a coin-hoarding strategy for Solana called DFDV, which was initially focused on DeFi but later shifted its focus to hoarding Solana coins, resulting in a 100x increase in its stock price. In Singapore, there is a company that was originally in the healthcare sector but saw significant gains after announcing its Bitcoin hoarding strategy. Therefore, I believe that the stock market's appetite for Web3 assets is currently very high.

A few days ago, a friend asked me to help analyze a question, essentially commissioning me to conduct a free "research project." He asked me why MetaPlanet and Hong Kong's Gangya stock, both advised by Jason from Solar Ventures, had such different stock price performances?

I have been contemplating this question as well. One possible reason is that Hong Kong lacks local funding, and investors have more options to choose from, so they may not necessarily need to invest in Gangya. The Japanese market, on the other hand, is relatively more closed off, with a large amount of local capital. Therefore, when a concept like "Japan's version of MicroStrategy" such as MetaPlanet emerges, the market is willing to buy in. It could also be due to a better, more concentrated chip structure, making it easier to speculate on in the market. Of course, I have not conducted in-depth research at this moment, so these are just some initial observations.

This situation highlights a phenomenon: the current craze for "coin stocks" is not limited to the US stock market. We have seen MetaPlanet in the Japanese market and projects like Boya and Gangya in the Hong Kong stock market. Although their price increases may not be as impressive as MetaPlanet's, they have all achieved substantial gains.

Hazel: It's not just companies that are invested in cryptocurrency, right? Some payment companies' stocks in the Hong Kong market, which aren't directly related to cryptocurrency, have also seen significant increases.

Zheng Di: That's how it is now. Even if you say you haven't explored the relevant business, the market perceives that you have. You can't say you don't. I say you have, so you do. For example, companies like Zhongan, Lianlian, and Yika have seen explosive growth, doubling in value almost every week.

What story did Zhongan tell? Zhongan roughly said, I own 43% of Zhongan Bank, and I am also one of the sandbox testers for Yuan Coin, the Hong Kong stablecoin, and an early shareholder of Yuan Coin with a single-digit percentage ownership, possibly not exceeding 10%. So, firstly, my assets in Yuan Coin will be valuable in the future. Secondly, if Yuan Coin reaches a stablecoin scale of, for example, 500 billion Hong Kong dollars in the future, most of the funds will be held in my Zhongan Bank, and I only need to give them a 2% interest deposit. That's the story, and it doubled in one week.

Why do I feel that this story is not very convincing? Because firstly, the concept of crypto-friendly banks has actually faded away. Originally, we knew why the U.S. stock Metropolis Bank and Signature Bank (which was not listed at the time) and Metropolis Bank and Silvergate were hyped. Silvergate even became a rare ten-bagger in U.S. bank stocks, roughly ten times in two to three years. Why? It's because at that time, even giants like Coinbase, only three banks in the U.S. were willing to do business with it, and other banks would not open accounts for it. So the fiat money deposited by customers could only be held by Metropolis Bank, Silvergate, and Signature Bank.

These three banks don't need to compete at all; they just receive fiat deposits from these Web3 enterprises and trading platforms, and there is no interest to be paid, it's zero-interest. And then they use this interest-free money to trade government bonds and MBS, making a spread of 2.5% or more. But as more and more banks are willing to serve Web3 enterprises and trading platforms, the era of zero-interest savings accounts as before is long gone.

Of course, Zhongan didn't tell this story, just said 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 in Singapore actually chose Standard Chartered as its collecting bank. Standard Chartered, in short, is more aggressive, has a better appetite, and is willing to take on these businesses, so it is more friendly than other banks. So in Hong Kong, the main bank actually uses Standard Chartered, and it is unlikely that all or most of Yuan Coin's reserve deposits are in Zhongan Bank.

Furthermore, we need to know that whether it is related U.S. regulations or the stablecoin consultation paper issued by the Hong Kong Securities and Futures Commission in July last year, they all prohibit the issuer of stablecoin from directly paying interest to users. We need to think about why. The reason is most likely because everyone is afraid of this competition; if the competition is too intense because later competitors will definitely say that I will pay interest when your predecessor does not, then I will come and promote it. After this competition, it will weaken the financial capacity of stablecoin issuers, and if it weakens, it may be more likely to go bankrupt, which could lead to very serious social events, with a very negative impact, so they prohibit directly paying interest to users. Of course, there are ways to bypass this, such as using promotional fees, but in any case, on the surface, literally, you are not allowed to directly pay interest.

We also need to consider one issue. If you create an HKD stablecoin and a USD stablecoin, what is your biggest disadvantage? Your interest rate is low. Whether you are buying CNH government bonds, Panda Bonds, or HKD, I don't know if HKD has government bonds, I haven't studied it carefully, but no matter what you buy, your interest rate is low. On the other hand, a casual purchase in the United States gives you 4%, so this is a disadvantage.

So, many people have not noticed that in the consultation paper from July of last year, it is allowed. The SFC actually allows Hong Kong stablecoin issuers to mismatch. That is to say, even if you issue an HKD stablecoin, you can actually buy, for example, RMB government bonds, CNH government bonds, Panda Bonds, with the current issuance scale of three hundred billion. For example, you can buy US government bonds to enjoy high interest rates, but you must have special approval from the Hong Kong Securities and Futures Commission. Secondly, you must have excess reserves, and excess reserves must hedge against the currency mismatch exchange rate risk. If these two conditions are met, you can buy other currencies' high-grade sovereign bonds, not necessarily having to be held within HKD deposits.

So, I think you will find that there is a huge information gap between the stock market circle and the circle that has long been researching stablecoins. Therefore, many people are more willing to believe in such narratives, and that's why we see a doubling in a week.

2. The Licensing World of Payment Companies

Zheng Di: LianLian and Yikatong both said that I obtained the US Money Transmitter Service license. In fact, in the crypto world in 2018, exchanges were very keen to obtain this Money Transmitter Service license and this payment license in the United States. We all know that these licenses are not actually very difficult to obtain. Especially the Money Service Provider (MSP) license is very easy to get, and you may need to spend maybe just 1 million US dollars on this license, I don't know the current price, but back then it was this price.

At that time, we all felt that the Web3 industry seemed to be doing some unnecessary work, which actually did not help the business at all. How come these have now become stories of these stock companies and listed companies? The circle of stock traders, they also don't understand these, they think this license is hard to get, but those of us who deeply engage in the Web3 industry should know what is truly hard to obtain, such as the BitLicense from the state of New York. Of course, Circle also has this license, and there are only a total of 20 licenses in the world, but in practice, you will find that the BitLicense of New York State, the entire transaction volume in New York State is very, very low. The business you can do with this license is very meager. Every quarter, the New York State Department of Financial Services has public disclosures.

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 all other states, including the federal government, including all other countries, such as when I have to deal with the Monetary Authority of Singapore (MAS), when I have to deal with the Hong Kong Securities and Futures Commission, or when I have to deal with the Dubai Financial Services Authority or Japan's Financial Services Agency. Let me tell you, if I have one of the 20 BitLicenses in New York State, aren't these licenses child's play 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 in the entire world, very difficult to obtain. These licenses from other countries, from other states, will give you a green light. So the reason why everyone is willing to get this license is for this reason.

Even the boss of the New York Stock Exchange (NYSE) who created the Intercontinental Exchange platform, which is now worth about two billion dollars, saw a sharp drop after MicroStrategy stopped working with them. But why has it been rising recently? I think the market is still speculating on whether someone will acquire it. What value does it have? Its business is actually very minimal now, with fee revenue of only 12 million in the first quarter, and this is before MicroStrategy stopped working with them, so we will definitely see a significant drop in the second quarter. But its only valuable asset is that it has one of the 20 New York State licenses, so everyone is speculating on whether someone might acquire it for these licenses.

So I think 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, where I tell a story, everyone believes it, everyone thinks it's amazing. But no one ever thinks about what's behind it. But now in the Web3 industry, these users have been trained to be very skeptical, I don't believe whatever you say. Unless you actually do buybacks and dividends, even if you have cash flow, I don't believe it, I only believe it when you actually do buybacks and dividends. This is how it is now, and it is also a manifestation of the lack of liquidity. In the stock market, I think liquidity is still very abundant, when it comes to various narratives and stories, it tends to believe first and then discuss, believe first and make money, and those who believe later are the bag holders. So now it is this kind of logic.

But I still want to say, when payment companies introduce stablecoin payments, like Liangliang, I also wrote an analysis of Liangliang, the card-to-card transfer has not been researched, Liangliang is partnering with BVNK, a UK stablecoin payment company. I think under optimistic circumstances, this could help it turn around. Under optimistic circumstances, I think it can increase profits by about 180 million, its current pre-tax loss is about 500 million, so it can still partially turn around, there is still some meaning. It can increase revenue by about 0.2% to 0.3% of the total payment amount as part of the profit increase, indeed stablecoin payments can bring some revenue growth, so the market's hype around some Web2 payment companies, I think it also makes some sense.

Hazel: You just mentioned the New York State financial license. I actually remember it. It should have been around 2018 when Circle was the first to obtain the BitLicense, right? Because at that time, I was just starting in the industry news coverage, and I seem to have a bit of an impression about it.

Zheng Di: Yes, this matter is actually very interesting, quite amusing. So, I think it distinctly reflects the model of power and money combining in the United States. That's why I always say don't think USDT is non-compliant. They have now tied themselves to the Minister of Commerce. This Minister's son used to be an intern at Tether, and now he's on board with Tether. I say it's actually USDC that hasn't clearly tied to anyone powerful. The U.S. power-money transactions actually started long ago. When do you think New York State had this idea to establish BitLicense? It actually started in 2013. Back then, didn't New York State hold a hearing? Then they said New York State was regulating too strictly, and they should loosen up; otherwise, the U.S. would lose its lead in Web3 technology, right? The idea of BitLicense actually originated from that hearing in 2013.

At that time, the moderator of the hearing was from the New York State regulatory department, and that official later invented the BitLicense. But what's particularly amusing is that after inventing this BitLicense framework, before issuing the first license, he resigned, he left, he started his own consulting company. He provided consulting services to all applicants for the license. I guess Circle probably also hired him, I'm not sure, but I guess it should be him because he's the one who invented it. Who else is more suitable than him to be a consultant to guide you on how to get this license, as he designed it himself? So, he made quite a bit of money by opening a consulting company.

So, you see, in the United States, this thing, the intertwining of power and money, has existed since ancient times; it has always been a commercial society, right? That's why I say the stock market's narrative, thinking that USDT is non-compliant and won't work in the future, while USDC is compliant and can seize your market share, this narrative is untenable.

3. Circle and Coinbase, Inextricably Linked

Hazel: You just mentioned that currently the most prominent partner of USDC is Coinbase. This is also one of the topics we are going to discuss next. In Circle's prospectus, it has been very clear about its relationship with Coinbase. This partnership to a large extent has affected Circle's net profit. Although its revenue is approximately $16 billion, after deducting various expenses, the net profit is only a little over $1 billion.

Zheng Di: This protocol is actually quite disadvantageous for Circle. The basic structure of the revenue-sharing protocol is as follows: Almost all of Circle's revenue comes from the interest on its reserves. These reserves can only be invested in US Treasury bills maturing within 93 days, repurchase agreements maturing within 7 days, demand deposits in banks, and money market funds investing in the aforementioned three types of assets.

However, many people do not actually understand the details of the Brilliant Act and mistakenly believe that a stablecoin can be invested in money market funds similar to those before the 2008 Lehman Crisis. In reality, regular money market funds usually allocate to longer-term bonds, such as 10-year Treasury bonds, and even assets like CDOs. When a run occurs, if the asset duration does not match the liability duration, a liquidity crisis may be triggered. However, the Brilliant Act clearly stipulates that the reserves must only include three types of short-term assets. As long as even a tiny bit of a 10-year Treasury bond is held, it cannot be considered compliant reserve.

Many traditional researchers may not have carefully read the act and, relying solely on experience and assumptions, analyze stablecoin risks, which can easily lead to misjudgments. 85% of Circle's reserves are managed by BlackRock, forming a Circle Reserve Fund that mainly invests 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 account. While this approach is conservative, it yields 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 the coin holders but pays it to promoters like Coinbase. This is actually a disguised profit-sharing mechanism.

The revenue-sharing agreement between Circle and Coinbase follows a "three-step" structure. Many people think that Coinbase takes 50%, but that is not entirely accurate. In reality, Circle allocates 60% of its revenue as promotional fees, with around $900 million going to Coinbase and an additional $60.2 million to platforms like Binance. This means that out of Circle's $1.6 billion revenue, apart from the promotional fees, it retains just over $600 million. More than $500 million of this is for its own management and operational expenses. After deducting taxes and other expenses, the final net profit is only about $161 million.

Coinbase takes over 56% of Circle's revenue, even though its platform holds an average of only 22% of USDC reserves. This disproportionately high income share compared to its actual market share is because the revenue-sharing mechanism is heavily in its favor. Specifically, the first step of this revenue-sharing agreement establishes the "payment basis," which is essentially equivalent to Circle's interest income. Circle first deducts 0.1% to 1% from this for operating costs, with the remaining amount entering the "product revenue sharing" stage.

At this stage, Circle and Coinbase will share revenue based on their respective daily average holdings of USDC on the platform. If Coinbase's USDC share on the platform is 22%, it will take this portion of the revenue; if Circle's share is 6%, it 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 accept 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 holding a 50% stake. However, by 2023, in order for Circle to independently pursue an IPO, it was necessary to untangle Coinbase's ownership. So, using its 8.4 million shares valued at over $200 million, Circle repurchased Coinbase's 50% ownership of Center. The transaction was valued at $25 per share and has since seen a multiple-fold increase in market value.

As part of the exchange, Circle signed two partnership agreements:

· Primary Partnership Agreement: signed in August 2023 for a three-year term. If, after the expiration of the agreement, Coinbase meets the KPIs for "Product Revenue Sharing" and "Ecosystem Revenue Sharing," it has the right to automatically renew for three years, with unlimited renewals thereafter.

· Ecosystem Partnership Agreement: stipulates that Circle and Coinbase must mutually agree in writing to introduce new ecosystem partners. This means that Circle is actually deeply embedded in Coinbase's ecosystem and cannot independently expand ecosystem resources.

The agreement also includes a "Legal Impediment Exit Clause": if future laws prohibit Circle from paying promotion fees to Coinbase, the parties must negotiate to amend the terms. If negotiations fail, Coinbase has the right to require Circle to transfer all trademarks and intellectual property, including USDC and EURC, to Coinbase.

The inclusion of this clause is clearly intended to guard against potential future regulatory prohibitions on "indirect interest payments" to promotion partners. For example, users holding USDC on Coinbase can earn a 4% return, which is actually interest paid by Circle to Coinbase and then passed on to users. If future laws prohibit this type of indirect rebate mechanism, Circle must cease paying promotional fees.

It can be said that Coinbase and Circle are very "sophisticated" in their protocol design, considering almost all potential legal risks and locking Circle completely into their own system through the protocol terms. Circle is not just a partner anymore but more like a "subsidiary 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 barriers but simply refuses to pay the revenue share, what can be done? In fact, there is no arbitration mechanism set in the agreement. However, because the agreement is governed by New York State law, Coinbase can file a lawsuit in New York. If Circle fails to fulfill the agreement, I believe that in most cases, they would lose the lawsuit. The court is highly likely to support the continuation of the agreement, and if Coinbase is firm enough, they may even directly demand that Circle hand over the trademark and intellectual property rights. In such a scenario, Circle would essentially be unable to escape from this agreement.

4. Perspective on the Risks and Opportunities of Coinbase

Hazel: You just mentioned the 4% interest rate, but now the interest rate Coinbase offers to users for USDC deposits is not just 4% anymore; it 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 cooperation agreement with Circle by increasing the USDC yield to attract users?

Zheng Di: That's a great question. Although many people think these two cooperation agreements are undisclosed, in fact, they are both attached to Circle's prospectus as annexes. It's just that the specific data details inside are not disclosed. According to US securities regulations, major cooperation agreements of a public company, key personnel employment contracts, etc., must be disclosed publicly. Going back 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 meets the target;

2. Ecosystem revenue sharing KPI meets the target.

The threshold for ecosystem revenue sharing is relatively easy to understand, such as Coinbase must continue to support USDC trading pairs, USDC's main chain deployment, compatibility of the official wallet, etc. Whether there are any platform exclusivity requirements is not clearly disclosed in the current agreement. The KPI for product revenue sharing may have set a minimum threshold, such as the platform must hold a certain percentage 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 think there are two possible explanations:

First, the protocol specifies an annually increasing KPI threshold. To meet the standard, Coinbase must spend money to attract more USDC deposits;

Second, even without a mandatory threshold, Coinbase knows that the more USDC on its platform, the more revenue it will receive. Since these subsidies are paid by Circle, with no cost pressure on themselves, they are naturally willing to promote this.

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

Coinbase's market maker trading fees are usually only between 0.12% and 0.16%, and ETF fees are estimated to be similar, so Coinbase's spot transaction fee income is facing 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 for 10%, totaling about 28%. If in the future XRP or Solana launches an ETF, these transaction fees will also be affected.

So the market may not realize a real problem: the more ETFs there are, the harder Coinbase's spot business becomes. If in the future the U.S. really launches over 40 crypto ETFs, Coinbase's domestic spot business will have almost no competitiveness. So, where is Coinbase's way out? I think it lies in two directions:

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

2. Derivatives Business: Not covered by ETFs, so the competition is not as intense. Coinbase's recent acquisition of Deribit is a key step in this layout.

From a strategic perspective, acquiring Circle is not cost-effective. Because Circle is already unable to escape protocol constraints, Coinbase has already gained significant benefits in the protocol and there is no need to buy the entire company at a high price. They just need to continue to absorb Circle's profits. Therefore, Coinbase is no longer focused on "fleecing the spot wool" from local users but is shifting its focus to offshore assets and derivative trading. For example, this 12% interest rate subsidy is not for all users but is focused on Deribit accounts or Global users. The initial subsidy threshold was low, such as no deposit amount limit, but later, due to a large influx of Chinese users, it quickly dropped to a single account limit of 1 million USDC, and now it is only 100,000.

However, some "carpet farmers" can achieve a $1 million limit with 10 accounts by going through multiple KYC and multi-account operations, and still enjoy a 12% annual interest rate. However, 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 recoups its cost.

5. The "Genius Act" and the Future of Stablecoins

Hazel: I read Artemis's report a few days ago, where they analyzed the $240 billion stablecoin market. The report began by highlighting a trend: the stablecoin industry is now shifting from being "issuer-driven" to "distribution-driven." It's becoming increasingly challenging for issuers to maintain profits, and channel capacity is starting to become a core competitive advantage. This also leads to the issue we discussed earlier regarding USDT and USDC. Especially after the stablecoin bill was introduced, everyone is pondering: after compliance, what kind of impact will various stablecoins face? For instance, in the context of heavy involvement from regulatory bodies, can Tether still maintain its leading position?

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

First, the issue of corruption remains unresolved. She criticized the bill for not prohibiting top government officials from participating in stablecoin business, raising concerns about issuing USD-1 stablecoins to the Trump family.

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

I've mentioned before that USDT (Tether) currently derives its main profits from the 18% "non-compliant assets" portion. This includes approximately 100,000 Bitcoins, 50 tons of gold, and investments in Bitdeer—a lot of people may not be aware that Tether is actually the second-largest shareholder of Bitdeer, holding a 25.5% stake.

In addition, it also holds a 70% stake in a sugar production company in Argentina, Adecoagro. Many people 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. Besides this, it also 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 can continue to exist, enjoying arbitrage opportunities. It could even launch a compliant version of its stablecoin in the U.S. as a "facade," while continuing to rely on its offshore model for its main business.

Therefore, we may see the following scenario: the offshore market remains Tether's "comfort zone," while in the onshore market, it lacks advantages in compliance and licensing. For example, in Europe, Tether did not obtain licenses under the MiCA (Markets in Crypto-Assets) regulations and has been delisted. In contrast, USDC can still be used in the European market, including some stablecoins that have obtained MiCA approval, and can continue to participate in traditional payment scenarios.

However, the European trading scene itself does not offer much profit potential. We can see this from the case of Bitstamp: this well-established European exchange 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 if compliant, its significance is limited.

Although the payment scene still has some potential in Europe, overall, the onshore market competition is already very intense. 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 fierce.

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

· PayPal's PYUSD was seen as a game-changer when it was launched. However, it currently only has a circulation of around $800-900 million, and I believe a significant reason is the reluctance to pay for promotion fees;

· USDC has a circulation of $61 billion, but the price it pays is that it allocates about 60% of its revenue to pay for promotion fees, which is essentially an extremely capital-intensive growth model;

On the contrary, Tether takes a completely opposite approach by not paying for promotion fees but instead charging 10 basis points to its partners. Tether's logic is: I provide you with open APIs, allow you to mint and redeem, and support you in market-making, which is already a form of "giving money," so you should pay me instead. However, we cannot rule out another scenario: if Warren's persistence, along with the voices of some Democratic lawmakers, eventually leads to the addition of strict provisions targeting offshore stablecoins in the legislation, completely blocking the space for "regulatory arbitrage," then Tether's existing model will be difficult to sustain. Therefore, the key ultimately depends on the regulatory stance. Will regulators truly impose comprehensive restrictions on offshore stablecoins? This is the fundamental factor that will determine the future landscape.

6.  The Two-Stage Rocket of Stablecoin Development

Zheng Di: I have always believed that the future development 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 be focused on the payment field, especially in areas such as cross-border transactions, cross-border payments, international trade, and commodity settlement.

In fact, Tether (USDT) has already entered the trade finance sector of commodities, using stablecoins as a financing payment tool. This type of application is expanding rapidly and is a key breakthrough in stablecoin development. Many people ask me, "How is it possible to reach a $2 trillion stablecoin market cap by 2028?" I believe that the main path to this goal is not through "trading scenarios" but through payment scenarios. The so-called "promotion fee" model we currently talk about is more focused on trading platform scenarios. In other words, stablecoin projects 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 payment scenarios, a similar promotional logic may also emerge—such as the issuer subsidizing payment institutions, banks, or corporate clients. This promotional approach in this 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, propelling rapid expansion of the stablecoin market cap.

In the second stage, it depends on when the U.S. Securities and Exchange Commission (SEC) formally relaxes the issuance threshold for security tokens (STOs) and significantly simplifies the compliance process. In fact, the new SEC chairman, Gary Gensler, publicly stated about a month ago that he would push in this direction. I believe that this is likely to be implemented in the next two years. Once STO compliance is widely opened up, the era of everything being on-chain will arrive. At that time, not only cryptocurrency assets, but all financial assets such as traditional securities, bonds, funds, etc., may be tokenized and traded on the blockchain.

In this process, on-chain transaction demand will once again significantly increase, and stablecoins as an important tool for on-chain payments and settlements will also experience a second wave of eruption. Furthermore, as mentioned by Michael Saylor in February this year, the total market value of stablecoins is expected to reach $10 trillion in the future, which is by no means a pipe dream.

Hazel: But I wonder, is user habit and network effect really so easily broken? For example, when Binance spent a lot of money promoting BUSD back then, it didn't end up particularly successful. Circle has spent many years connecting with numerous partners for business development, advancing regulatory communications, and opening up channels. Is it really so easy for these accumulated efforts to be 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 believe that stablecoins are mainly for 2C (consumer-facing) purposes, then indeed, as you said, capturing user mindshare is very difficult, and the barrier to entry for newcomers will be very high.

However, the issue is that we are now entering a new stage: 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. While we may hear about some offshore payment cases, such as Russia settling oil sales in a certain 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 sunshine cross-border payment scene. There is a real demand in this area, and the number of participants is increasing. More importantly, the payment scene is mainly 2B (institutional, platform, enterprise-level), not 2C. You can understand 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 may still be VISA, MasterCard, Apple Pay, etc., but the underlying clearing and settlement technology can now be replaced by stablecoins. Companies like Bridge, which build on-chain payment infrastructure, can sell for $1.1 billion with a 100x PS multiple because of its "seamless technology replacement" potential.

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 greatest advantage. When you change the underlying system, users do not need to be re-educated. And precisely because it is a 2B scenario, the replacement and competition of stablecoins in these areas are not so difficult. Corporate partnerships often depend more on benefit exchange, such as how much promotion fee you are willing to share.

Let's say I am Meta, and I have a huge ecosystem. Do you want me to integrate your stablecoin system into the platform, or is it "Zuck's call"? And Meta's users, the vast majority of them have no clear understanding of "stablecoins." They only know that they receive rewards, make payments, or settle on Facebook or Instagram, but they don't know what asset is being used underneath. It is for this reason that I believe that in the next 1 to 2 years, the payment scene will be the most important incremental breakthrough for stablecoins. In comparison, the significant expansion of transaction scenarios will have to wait until the STO (Security Token Offering) process is truly streamlined, and the full-scale implementation of everything on the chain begins before the demand in the chain-based financial ecosystem becomes active again.

7.  Big Tech Companies and Stablecoins

Hazel:  Earlier, we discussed Meta, and I've always had a question. According to the Genius Act proposal, the issuer of a stablecoin should be considered a "financial institution," right? But Meta is a tech company. So, can it forego issuing the stablecoin itself and instead have it issued by another entity with a financial license, while Meta handles its use and distribution? Or could Meta establish a financial subsidiary to issue the stablecoin, thereby "bypassing" the entity restriction?

This question just came up in a discussion with a friend 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'd like to say: If it were that simple, Meta would have done it already. Why doesn't it issue the stablecoin itself and instead run a pilot on Instagram and collaborate with external stablecoin projects? This indicates that the issue is not that straightforward. The core reason is likely that the Genius Act's regulation of "big-platform tech companies" is one of "pervasive supervision." In other words, whether you hold a bank or establish a subsidiary, or find a concerted actor, as long as the regulator views this as Meta's substantial control or involvement, it will still be restricted.

In other words, even if you use a front company to issue a stablecoin, even with a financial license, if it is actually Meta pulling the strings behind the scenes, it may still be restricted. The Genius Act may be meant to clearly draw a red line: tech platforms cannot directly control stablecoin issuance. Of course, it's also possible that the regulatory framework has not yet been fully implemented, and even Meta is watching from the sidelines. They don't know if the new rules will really penetrate into operations like subsidiaries or indirect shareholders. But from what is seen so far, "not getting directly involved and just receiving promotion fees" is actually the safer choice for Meta.

So, I believe Meta is not unable to do it but rather does not need to. If you really go ahead and issue a stablecoin, then 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 the "scene entry point," it can completely embed the stablecoin as a payment or interactive tool into its platform and let others bear the compliance, regulatory, and settlement risks.

I have always said that Web3 is increasingly resembling the internet. Ultimately, it is "scene-driven, traffic-driven," rather than who controls the infrastructure. With so many public chains, stablecoins, and clearing systems, anyone can do it technically, but those with real scenarios and users are the core of value. If Ethereum is too expensive, I'll find a chain like Aptos that is cheaper but not widely used; if Tron is too slow, I'll switch to another chain. For platforms like Meta, with massive distribution capabilities and user bases, it has no need to personally "dive in" to regulatory territory.

8.  Financially-oriented Stablecoin or Tokenized Money Market Fund

Hazel: Regarding some non-mainstream types of stablecoins, such as the Ethena-USDe that has attracted attention from the community from last year to this year, which is a financially-oriented stablecoin with an "interest-bearing" attribute, what is the future direction of such compliant stablecoins?

Zheng Di: My assessment is that this type of stablecoin may always remain a niche market. According to current legislation in the United States and Hong Kong, the future path for such interest-bearing stablecoins towards "transparency" is very challenging. Although figures like BitMEX founder Arthur Hayes openly support this model, in reality, regulators exhibit a highly cautious stance towards such products. In other words, the future space for such stablecoins may likely be limited to certain "non-compliant gray areas" or small-scale experimental environments and may find it challenging to enter the mainstream financial system.

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

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

This essentially means that stablecoins are no longer the only "base currency" choice in on-chain financial scenarios. Furthermore, if TMMF products can achieve high-frequency settlements in the future, such as daily settlements, and even further bridge the exchange channels between TMMFs and stablecoins, then they may also have payment functionality in some B2B payment scenarios, especially in areas such as large-value cross-border payments, corporate settlements, and supply chain finance. These are not consumer scenarios for buying 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 have a place in these scenarios in the future.

9.  The Change and Constancy of the Old System

Hazel: Earlier, we also mentioned Visa and Mastercard. As global card networks, they hold significant influence in the cross-border payment space. Circle itself has a network called CPN. I am curious about the future relationship between this CPN network and Visa and Mastercard. Especially, as you mentioned, if Visa and Mastercard themselves take steps to drive change in the future, could they potentially "take over" 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 was led by Horn Ventures, a name you should be familiar with. Horn's founder is the former SEC General Counsel who later founded a VC firm, a16z, which became its largest LP. Horn Ventures is now a well-known investment firm in the United States. This funding round also saw 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 specifically mentioned that they have processed approximately $300 million in stablecoin payments. Of course, this number is insignificant compared to Visa's overall transaction volume, but it shows their experimentation.

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

We have to ask a question: If stablecoins are widely adopted in the future, can KYC and AML be bypassed? I believe it is impossible. Therefore, Visa and Mastercard may still be able to rely on KYC/AML interfaces to charge service fees in the future. They can serve as globally recognized KYC/AML API providers, and even if they are not the main players in transactions, they can still collect a "toll."

In other words, whether it's Circle, Tether, or other stablecoin companies, they will ultimately need to connect to 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 remains. However, in scenarios with low KYC requirements, they may face some impact.

My assessment is that Visa and Mastercard's gross margin may decrease by 5 to 7 percentage points, and their total revenue may face a 20% to 30% impact. However, their core business should not be significantly 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 rule-making, especially regarding open compliance interfaces.

However, so far, we have not seen substantial actions from Visa and Mastercard in stablecoin infrastructure development. The more active participants now 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 technologically advanced, with capabilities such as cross-chain instant payments, which provide a user-friendly experience. However, from an investment perspective, what is more crucial is whether it can generate actual revenue. Investors are more concerned about scenario promotion and monetization capabilities. The two core scenarios for stablecoins are trading and payments. I believe that at least in the "sunshine" scenario of payments, the current emphasis is more 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 and replace some intermediaries and channels. This is why cross-border payments have become a key breakthrough direction. Card networks, payment institutions, and banks all have opinions about SWIFT. Many participants now hope to bypass SWIFT and establish their own chain, with the U.S. government willing to participate in regulation as long as they can still control KYC/AML. Therefore, SWIFT has become a relatively weak link. The current promotion of stablecoin payments is an attempt to cut a slice within the traditional financial system and integrate it, rather than overthrowing and rebuilding. I believe this approach is feasible and can advance rapidly.

Once the U.S. "Genius Act" is passed, the main driving forces may be banks and payment institutions, with the possibility of card networks also joining. However, the most proactive entities currently are Stripe and several major banks. Conversely, small and medium-sized banks may face significant challenges, especially those heavily reliant on savings and loan profitability and card issuing.

The U.S. Treasury Department's advisory body TBAC has proposed a viewpoint: if the Genius Act passes, there may be a "move" of up to $6.6 trillion in deposits. However, large banks are not concerned about this because they can issue their stablecoins and have diversified businesses to hedge against risks, with the biggest threat being to small and medium-sized banks. Once they lose their savings, they lose their credit derivative ability. Additionally, many small banks rely on card issuing commissions. If this area is also replaced by stablecoins, they may struggle to continue. This means that after the act is passed, it may trigger widespread closures of small and medium-sized banks in the United States.

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

Zheng Di: Exactly, but I believe that we will definitely see the rise of on-chain banks. Large banks in the future may discover that stablecoins can not only be used for payments but also for lending. Once stablecoin payments are widely accepted, people will be willing to stay in stablecoins rather than immediately convert them to fiat currency, expanding the circulation of stablecoins.

Currently, most on-chain lending protocols are collateralized loans, primarily using Bitcoin as collateral, with an LTV ratio of 64% and an interest rate of 8.5%. This business essentially caters to "loans for the wealthy." Why is there a lack of unsecured loans? It's due to the absence of a credit scoring system like FICO. But if traditional importers and exporters are willing to settle in stablecoins with a sound credit rating, on-chain unsecured loans can be realized. Banks will also realize that issuing stablecoins, attracting deposits, and then lending can be profitable, potentially giving rise to "stablecoin banks."

Therefore, it is true that small and medium-sized banks will indeed experience disintermediation, but credit derivatives will not disappear; they will simply take on a different form with a new set of players. Traditional research often suggests that financial disintermediation will weaken credit derivative capabilities, but I don't entirely agree. The path of credit derivatives may change, and the participants will change.

10 Circle Founder Jeremy Allaire and His Story with China

Hazel: We just discussed some of the investor information disclosed in Circle's IPO prospectus, including investment from Chinese institutions such as IDG Capital and Huaxing Capital. This actually surprised many people because not everyone knew that Chinese capital had invested in Circle early on. This investment now appears to have been extremely rewarding, potentially yielding over a billion dollars in less than ten years, making it a classic case in the venture capital field. So the question is: How did this Chinese capital get involved with Circle?

Zheng Di: It's actually not that complicated. A decade ago, the crypto industry was a time when Chinese capital was very active. From USDT (Tether) originating in Hong Kong to Ethereum and other early-stage public blockchain projects, there was significant involvement from the Chinese community. Chinese investors themselves were key players in the early Web3 trading market, and the mining circle had also accumulated a substantial amount of funds, with many mining bosses participating in early-stage equity financing. Moreover, Chinese VCs at that time were at the peak of the mobile internet boom, had abundant funds at their disposal, and were keen to explore this new direction of Web3.

Circle's CEO Jeremy Allaire was actually very focused on 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 institutions, and more. At that time, he clearly hoped to introduce the concept of USDC or stablecoins to China and promote local partnerships.

Hazel: I actually 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, in the lobby of a hotel in Beijing for a brief interview. At that time, stablecoins were far from being as widely recognized as they are today.

The second time I met him was at a closed-door seminar. This was after the Libra incident, where stablecoins became the focus of policy discussions. At that time, I was working for Caixin and had organized a weekend conference where the director of the central bank's digital currency research institute, Jihan Wu from Bitmain, among others, attended. I happened to facilitate Jeremy's participation in this small closed-door meeting, and he seemed to have specially flown in from overseas to be there on the weekend. He still had expectations for China's involvement and regulatory acceptance.

The third time was in 2022 in Davos. That year, due to the pandemic, the winter meeting was postponed to May and became the only Davos with "no snow." Circle was one of the main sponsors that year, and I could see their large advertisements as soon as I arrived at the station. We met again, but this time he was not talking about China at all; instead, he was focused on compliance and stablecoin legislation in the US. At that time, the draft of the "Stablecoin Bill" was being discussed in the US Congress.

My biggest takeaway from these exchanges was that he was really committed to a very steady path. In an encryption industry full of "pirate culture", he insisted on being the "navy", sticking to the compliance path, and really turning Circle into the size it is today, which I found incredible at the time.

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

· He co-founded Allaire Corporation with his brother in 1995, which went public in 1999, reached over a billion dollars in revenue in 2001, and was eventually sold to Macromedia, which was later acquired by Adobe. He also became the CTO of Macromedia and made significant contributions to core products like Flash Player. Some of the earliest products they developed at Allaire Corporation are still in Adobe's suite.

· 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 exploration in trading platforms, payments, stablecoins, and other businesses, ultimately focusing on USDC and officially IPOed in 2025.

In my view, he is a cautious and visionary entrepreneur. In the early years, Circle also explored diversification, such as acquiring a trading platform and developing wallet services. However, once he identified USDC as the future mainstay, he resolutely pursued this path. I greatly admire his ability to maintain direction in 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, despite regulatory constraints, Tether has already ventured into commodity payments. Can Circle also expand into similar scenarios? Or even integrate with emerging fields like AI, or promote new currency products such as a Euro-backed stablecoin? How do you see the future of stablecoin companies?

Zheng Di: I think it can certainly expand, but the biggest issue is whether the funding is sufficient. Why can Tether enter the bulk commodity scene? Because it is really lending money. We need to understand that although there is a demand for stablecoin payment scenarios, compared to financing scenarios, its necessity is not as strong. Especially in buyer or seller credit—if you can lend money to me, that is real strength.

Tether's strategy is to leverage funds into scenarios. Its total loans amount to $8.8 billion, with about $14 billion in proprietary capital investment, plus some other investments, totaling about $30 billion in external investments and loans. In an offshore state, if it continues to be "non-compliant," this $30 billion "checkbook" can easily drive the use of stablecoins, especially in bulk commodity scenarios. Essentially, it is no longer just a stablecoin company but a stablecoin + bank model.

In this case, using loans to drive stablecoin payments is much easier. Circle cannot do this because it does not have loan capabilities. If it can only persuade others to use USDC through business development (BD), it is very difficult. Unless there are large buyers like the Trump family willing to fully adopt USDC, it is unlikely. But fundamentally, what they are aiming for are resource relationships, such as establishing connections 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 partnership with Ant Group. This demonstrates that the scenario is not primarily driven by payments themselves but by credit capabilities. Tether binds lending and payment scenarios: lending with USDT and receiving payments also in USDT, which you must accept because the main holder has the power.

On the other hand, Circle's main issue is the lack of this "checkbook" and the inability to strongly control the scenario, as its resources are limited. Most of its funds need 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, relying solely on industry dividends to gradually accumulate.

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

A deeper analysis will reveal that Tether and Circle are fundamentally different species. If Circle lacks the ability to control the scenario, it must "hitch a ride." Even the scenarios Coinbase can provide are limited. We could even pose this question: in three to five years, when Robinhood and Coinbase have similar profits and market value, who will win? Most people would probably choose Robinhood because of its broader user base and more scenarios. Robinhood even acquired Bitstamp, expanding into the European market.

Therefore, Coinbase's main problem is insufficient scenarios and users, possibly even facing user attrition, especially in its spot business. So when I say Circle didn't grasp the opportunity, it is not just a political resources issue but also a lack of business resources. For instance, Stripe, a significant partner for Bridge after launching USDB, also received equity in exchange. There are also banks, card networks, payment companies, and major Chinese trade companies, all of which are crucial partners.

All of these factors could lead to the large-scale 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.

Furthermore, China should now also realize that the competition between the digital renminbi (CBDC) and private stablecoins has already yielded clear results. The more effective path is actually to have private companies issue stablecoins, with the government conducting stringent regulation, KYC, and anti-money laundering controls, and then promoting these stablecoins overseas. This "soft control" model is actually superior to the officially-led CBDC model. That's why more and more people are now calling for the issuance of offshore RMB stablecoins. Dr. Shen Jiangguang from JD.com specifically wrote an article pointing out: China cannot afford to miss out on this track.

In the future scenario we envision for international trade and commodity payments, the competition among stablecoins will not only be among different versions of the US Dollar, but will also involve Euro and Yuan-denominated stablecoins. You must consider a crucial question: Who is the most significant player globally in commodity and goods trade? It's not the United States, but China. While the U.S. excels in services trade, in the physical goods sector, China is undeniably dominant.

If in the future China promotes an offshore Yuan stablecoin, and Chinese businesses no longer use USDT or USDC but opt for a Yuan stablecoin, this would pose a significant competition to existing Dollar-denominated stablecoins. Hence, I believe the outlook for this race is broad, but the competition will be fierce.

On the technological innovation front, the space for advancement is somewhat limited. For instance, the barrier to entry for AI is not as high, and as of now, the direction of AI Agents seems challenging to break through. Large AI model companies have started creating their own agents instead of just offering base models. Those who were excitedly founding AI agent startups last year now realize that their advantage is no longer apparent with the direct involvement of big model companies. Therefore, from a technological perspective, the barriers are not that high; true value lies in use cases and users. If Circle were to abandon its core business and pursue a flashy direction, it might encounter issues. It should focus on its core business and cultivate it deeply.

Regarding the possibility of non-Dollar stablecoins in the future, I believe the most promising are Euro-denominated stablecoins and offshore Yuan stablecoins. Many countries worldwide have already undergone dollarization, with regions in Latin America, Africa, and Turkey commonly using Dollar-pegged stablecoins. If China and Europe do not promote their stablecoins, they will fall behind in the new financial order. Therefore, I do not think they will allow a Dollar-controlled stablecoin company to take on the issuance of non-Dollar stablecoins.

Hazel: To provide another example, suppose Meta used USDC, what would happen?

Zheng Di: If Circle could successfully partner with Meta and make Meta its strategic shareholder, that would be a crucial breakthrough. You see, actually Circle and BlackRock already have a similar agreement. During the term of the agreement, BlackRock is the sole manager of Circle's Reserve Fund, with the managed funds possibly reaching billions of dollars. As part of the exchange, BlackRock cannot issue stablecoins independently or support other stablecoins; it can only back USDC. In this manner, Circle essentially ''binds'' BlackRock.

So, could Circle bind Meta in a similar way? Binding a large tech company, deeply integrating into its ecosystem rather than merely cooperating tactically, such as Meta using USDC today and potentially using USDP or USD1 tomorrow, or even seeking cooperation with the Trump camp, is not entirely implausible. However, if it could secure an exclusive agreement, like making Meta a strategic shareholder and exclusively promoting USDC, the prospects for Circle would be limitless. The question is whether it has the capability to facilitate such a binding.

12. Institutional Onslaught, What Investment Opportunities Are Left for Retail Investors

Hazel: As time is nearly up for us today, let's discuss one final question. With Circle aggressively pushing for its IPO, could this bull run be 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 plenty of investment opportunities. At the current stage, opportunities mainly lie in equity tokens, specifically stocks related to Web3. Many well-performing Web3 companies today may eventually choose to IPO or go public through a reverse merger. Additionally, numerous Web2 companies will gradually "add Web3," similar to how they once "added the internet" or "added AI." This is because the wealth effect of Web3 in the stock market is overwhelmingly evident.

The logic behind this is also quite simple: companies leveraging Web3 to reduce costs or increase revenue, as long as they have a solid foundation, have the potential for their stock prices to be driven up. This is an important insight for both public companies, founding teams, and entrepreneurs in the Web3 space. Currently, liquidity and wealth effects are prominently concentrated in the stock market. From an investor's perspective, the primary focus should be on equity tokens. Once the future macro environment becomes more lenient, attention can then shift towards altcoins. At that point, altcoins may truly begin their bull run. Fund flows determine market hotspots.

Hazel: Today's discussion was very engaging, and I feel we delved quite deeply into this topic. We will continue to release more content on topics such as digital currencies, stablecoins, cross-border payments, and more in the future. If you resonate with the viewpoints we shared on the show and believe this is a vast playing field, then continue to follow our podcast as it is likely to provide you with many insights and perhaps uncover some noteworthy opportunities. Thank you, everyone!

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