Rumors are circulating that the Securities and Exchange Commission (SEC) will soon issue an enforcement notice to Circle over its stablecoin USDC.
The move comes as part of the SEC’s current crackdown on stablecoins and follows its enforcement letter to Paxos, demanding the exchange stop minting Binance stablecoin BUSD because it may be a security.
In a statement issued last year, SEC chair Gary Gensler argued that stablecoins could be defined as securities due to the “wide brush” by which Congressional law defined securities. Gensler argued that:
“Stablecoins have features similar to, and potentially competing with, money market funds, other securities, and bank deposits, and raise important policy issues.
“As discussed in the President’s Working Group Report on Stablecoins, it is important to ensure that we have appropriate safety and soundness protections, investor protections, and safeguards against illicit activity.”
According to the SEC’s own definition, money market funds are funds that give an interest rate payment slightly higher than bank accounts.
“Money market funds, sometimes called money funds, are a type of mutual fund developed in the 1970s as an option for investors to purchase a pool of securities that generally provided higher returns than interest-bearing bank accounts,” says the SEC.
“Money market funds invest in high-quality, short-term debt securities and pay dividends that generally reflect short-term interest rates. Many investors use money market funds to manage their cash and other short-term funding needs. They have since grown significantly and currently hold about $3 trillion in assets.”
According to Gensler, Circle can expect an enforcement notice over USDC because the reserves backing USDC are managed in a money market fund called Circle Reserve Fund. This fund is managed by BlackRock and specializes in money, cash, and treasuries that mostly mature in no longer than 397 days.
Indeed, Circle has admitted that its “operations are directly impacted by changes in interest rates, among other macroeconomic conditions.” Currently, Circle is making most of its profits from treasury yields, yet, inversely, it has also suffered a lot of USDC selling as holders sold their stablecoins to put their cash into treasuries.
The SEC’s potential enforcement notice to Circle will be ironic given that it’s been reported that it was Circle itself that tipped off the authorities on BUSD and kickstarted the SEC’s investigation.
Meanwhile, large movements of USDC have been reported on the chain. This is allegedly due to USDC holders trying to sell their coins on Binance. USDC is currently the second biggest stablecoin with a $40.9 billion market cap.