Coinbase and Circle remain two of the most well-known and trusted organizations in the crypto space, as well as leaders for the U.S. crypto sector as regulators continue cracking down. This is why the changing nature of the partnership between the two firms is worth examining, with Coinbase investing directly in Circle for an as-of-yet ownership stake.

What some investors might not have been familiar with is that the widely traded and high profile stablecoin USDC
USDC
 was not entirely managed by Circle, the issuing institution. Rather, the Centre Consortium governed the USDC stablecoin, which can be an overlooked aspect of the stablecoin sector. Especially following the revelation that over $3 billion of reserves underpinning USDC were kept in what was in essence an uninsured account at Silicon Valley Bank, governance, compliance, and internal controls have returned to the forefront of crypto project conversations.

The specifics of this announcement, while not fully disclosed, have revealed two significant changes for these crypto leaders. As alluded to above, Coinbase will receive a non-controlling stake (specific percentage has not yet been disclosed) in Circle Internet Financial. As a result of the dissolution of the Centre Consortium, Circle will bring both the issuance and governance of USDC entirely in-house. Lastly, six more blockchains will gain native support for USDC, increasing the total number of supported blockchains to 15. There have been several significant changes in the crypto landscape, with stablecoins leading the way in many sectors, and these trends do not seem set to abate any time soon.

Let’s take a look at a few of the changes that the new Coinbase and Circle arrangement might have on the crypto sector.

Stablecoins Are Here To Stay

Despite detractors stating that stablecoins serve limited economic purpose and are no different from money market funds, the reality is shaping up to be far different. With major players such as PayPal
PYPL
 joining the stablecoin ecosystem, and the growing prominence of Circle, the fact is that stablecoins have a critical role to play in the crypto sector. Mainstream entrepreneurs, individuals, and organizations are simply not going to want to take on the financial and legal risk that can arise from leveraging bitcoin as a payment system, at least under current U.S. policy. Stablecoins have long been discussed as an essential on-ramp to 1) educate and 2) show the mainstream business community the benefits of tokenized payments and other transactions.

Circle, in addition to the recent announcement with Coinbase, has also recently attracted investments from TradFi titans such as Blackrock and Fidelity. Stablecoins might have been categorized as a boring subset of crypto, but apparently boring is the new best way to attract capital.

Stablecoin Profits Can Get Tricky

One aspect that can get lost in the stablecoin conversation, and the crypto one at large, is that stablecoins are one of the few use cases that has a concise and relevant straight forward business case. Issuers of stablecoins track these tokens (assuming correct accounting of course) as liabilities, and hold assets in reserve to maintain whatever the advertised peg is (1:1 to USD for example), as well as for liquidity purposes. These reserve assets include a mix of dollar-denominated assets such as cash, short-term treasury bills, and other equivalently low risk and list financial instruments. Up until 2020-2021, with interest rates near all time lows, this business model did not create especially lucrative outcomes, but with the recent hikes in rates, this conversation has changed.

With speculation that interest rates will be higher for longer, profits on these reserve assets are set to increase significantly compared to past levels.

Questions that investors should be keeping in mind related to these higher stablecoin incomes can be summarized as follows. First, are there going to be plans or announcements connected to potentially distributing these profits? Secondly, as these profits are distributed at some point to stablecoins holders, will this potentially trigger securities laws for stablecoin issuers? Minimal evidence suggests this will happen any time soon, but as stablecoins and issuer profits rise in profile, it is reasonable to expect these types of questions to follow.

Stablecoin Reporting Will Improve

Crypto accounting and reporting has long been a weak spot for the sector, and the litany of failures connected to stablecoins has done nothing to improve this reception. Even as the Financial Accounting Standards Board (FASB) is set to issue the first-ever crypto specific accounting guidance by the end of 2023, there remain many accounting issues that remain unaddressed. One particular area that will become more obvious in the lack of authoritative and consistent rules is around the attestation and reporting of underlying assets either held by stablecoin issuers and crypto exchanges.

Multiple private sector options have arisen quickly and fallen out of failure, including proof of reserves, but that should be seen as part of the stablecoin maturation process versus and indictment of the products at large. With an increasing number of stablecoins issued and managed by TradFi institutions, and the stablecoin market forecasted by Bernstein to approach $3 trillion by 2028, the necessity for better and more comparable reporting rules is readily apparent. The accounting and audit profession should capitalize on these trends to advance the development of crypto-specific attestation, audit, and reporting standards. More transparency will only help the sector in the long-term.

Coinbase and Circle are making headlines, and this new partnership will only strengthen the stablecoin sector moving forward.

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