Wall Street's biggest players just gave stablecoins a serious leg-up. Circle, the company behind USDC, the second-largest stablecoin, last week announced a $400 million funding round with investments from BlackRock, Inc., Fidelity, Marshall Wace LLP, and Fin Capital.
In addition, Circle has entered into a strategic partnership with one of the funders, the investment firm BlackRock, with the goal of "exploring capital market applications for USDC."
"This announcement sparks a huge 'coming of age' moment for the crypto industry as a whole," said a Circle spokesperson. "Circle plans to continue collaborating with traditional finance leaders to accelerate mainstream adoption of USDC and blockchain technology for payments, commerce and financial applications."
The investment comes amid a series of high-profit endorsements from traditional finance.
Morgan Stanley last week said that stablecoin issuers should be regulated as banks — a quasi-stamp of approval — and the Depository Trust & Clearing Corporation, which processes the bulk of financial transactions, launched a prototype for a digital dollar.
This kind of institutional support truly could mark a "coming-of-age moment" specifically for stablecoins, which serve a crucial role in holding the crypto world together. Backed by fiat currencies, these money-like digital assets are used to facilitate trades on crypto exchanges. Rather than using dollars, traders use stablecoins to buy and sell cryptocurrencies like Bitcoin and Ether.
As a result, stablecoins are the most highly-traded digital assets, and whatever happens to them is likely to ripple through the rest of the crypto ecosystem. By the same token, whatever happens in the crypto ecosystem is likely to ripple back into stablecoins.
Indeed, over the weekend, news broke of yet another multimillion-dollar crypto theft. This time, the target was an Ethereum-based stablecoin protocol called Beanstalk Farms. The attacker made off with at least $80 million worth of crypto, according to blockchain security firm PeckShield, and crashed the market for the protocol's BEAN stablecoin.
The attacker took advantage of a controversial feature of decentralized finance, or defi, known as flash loans, which are essentially instantaneous loan deals that are structured through smart contracts, to take out a large amount of Beanstalk’s native governance token. Once they had enough tokens to manipulate the blockchain, the attackers made off with the funds.
This is just one example of the rampant fraud taking place on defi applications. According to the crypto analytics firm Elliptics, more than $10 billion worth of user funds were stolen from defi products in 2021. In 2022, there have already been several record-breaking thefts, including the more than $600 million stolen from the blockchain game Axie Infinity.
Stablecoins are not necessarily to blame for the weaknesses in a particular defi application or blockchain, but again, they are an essential ingredient in making defi possible.
"Without stablecoins, defi really does not work," said William Quigley, co-founder of Tether.
With these types of security threats still rampant in the fledgling defi universe, why are major financial institutions such as BlackRock now willing to put their weight behind the industry?
BlackRock did not respond to requests for comment, but Circle did provide a hint of what might come out of the partnership with the investment firm.
"We are exploring use cases where USDC may be an efficient resource in the financial services value chain and will work with BlackRock as an innovation partner," a spokesperson said.
Circle didn't provide additional details on what those use cases might be, but Quigley, as a long-time supporter of defi and stablecoins, had a few ideas.
In particular, he said stablecoins avoid the problem of chargebacks (i.e. when a transaction is reversed). They also allow same-day, cross-border transactions.
"In 2022, on planet Earth, there is no way to send money cross-border the same day," Quigley said. "The only way you can do it is put physical money in a suitcase and get on a plane. With tokenized fiat, you can do that."
He added that a number of financial applications would become possible if transactions could close on the same day. In other words, stablecoins could bring more speed to global finance
