Wise, a fintech, is now offering its U.S. customers 4.13% interest as well as FDIC deposit insurance. Meanwhile, the native yield on USDC stablecoins is still at 0%. Nor is USDC insured.
If Wise can offer interest and insurance to customers, why can't Circle (the issuer of USDC) do the same?
Wise and Circle are alike in a legal sense. Neither is a bank. Both are licensed as money transmitters. So why can one money transmitter offer a valuable set of services, but the other seemingly can't?
To be more accurate, it's not Wise itself that is offering these services. Wise is neither a bank nor a money market fund, so I'm pretty sure it is legally prevented from paying interest. And since it's not a bank, it can't be a member of FDIC. Rather, it is Wise's own bank, JP Morgan Chase, that is offering these services to Wise customers. Wise simply passes on the interest along with the insurance coverage.
So if Wise is just a feeder for JP Morgan, connecting its customer base to the bank, why can't Circle perform the same feeder role with its own bank, BNY Mellon, and USDC users?
I suspect one factor preventing this is the pseudonymity of stablecoins. There are many users of USDC, but Circle has only collected ID from a small fraction of them. A big chunk of USDC's pseudonymous user base is comprised of financial machines, or smart contracts, for which the concept of identification is meaningless. As for individuals or businesses who hold USDC, they may not be willing to, or can't, pass through a traditional verification process. Banks, however, have very strict onboarding rules. They must collect the ID of every single customer.
In short, it's probably quite tricky for Circle to feed USDC's mostly pseudonymous user base into an underlying bank in order to garner interest and insurance, at least much harder than it is for Wise to feed its base of known users into a bank.
It's possible that some USDC users might be willing to give up their ID in order to receive the interest and protection from Circle's bank. But that would interfere with the usefulness of USDC. One reason why USDC is popular is because it can be plugged into various pseudonymous financial machines (like Uniswap or Curve). If a user chooses to collect interest from an underlying bank, that means giving up the ability to put their USDC into these machines.
This may represent a permanent stablecoin tradeoff. Users of stablecoins such as USDC can get either native interest or no-ID services from financial machines, but they can't get both no-ID services and interest.
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