USDC vs. Tether: Can Circle’s Stablecoin Giant Topple the King?

The stablecoin wars just got hotter. USDC, Circle's regulatory-friendly darling, now holds the silver medal in market cap—but Tether’s throne looks wobbly.

Behind the numbers: USDC’s relentless march

Transparency and audits give it institutional cred, while Tether shrugs off FUD like a crypto cockroach. But can Circle’s compliance-first playbook outmuscle the liquidity beast?

The trillion-dollar question: Who blinks first?

Hint: Wall Street loves a ‘clean’ stablecoin—until they need liquidity at 3AM. Place your bets.

1. Global expansion

Even though both Tether and USDC are pegged 1:1 to the dollar, there are several key differences. For example, Tether is domiciled in the Caribbean, while USDC is a U.S-based stablecoin. The issuer of the USDC stablecoin is New York-based(CRCL -2.01%), which became a publicly traded company on the New York Stock Exchange earlier this summer.

This only enhances the perception that USDC is the stablecoin that America uses, while Tether is the stablecoin that the rest of the world uses. Tether currently towers over USDC in terms of market cap as it has 350 million users worldwide, and is very popular in emerging markets. For its part, Circle says that 70% of USDC usage is now coming from beyond U.S. borders.

From my perspective, USDC still needs to expand its footprint internationally, and that means lining up foreign partners. In the U.S. market, USDC has already partnered with several financial institutions and fintech providers, including(NASDAQ: COIN). Now, it needs to expand on those partnerships to grow its global footprint.

2. Growth with institutional investors

USDC also has an opportunity to become the preferred stablecoin of large institutional investors. Interestingly, the passage of the Genius Act by Congress may have opened the door to that happening sooner than anyone expected.

That's because the Genius Act is very clear about the backing of stablecoins by stablecoin issuers. At a minimum, a stablecoin must be backed 1:1 by cash and cash equivalents. The Genius Act expressly says that any other FORM of backing for stablecoins is unacceptable.

And that's where things get interesting because Tether has been opaque in the past about the backing of its USDT stablecoin. In the past, for example, it has used cryptocurrency, gold, and even commercial paper as backing. According to the Genius Act, those are ineligible assets.

Moreover, Tether has been much less forthcoming than Circle about showing proof of its reserves. Even before the passage of the Genius Act, there was concern that Tether might use its offshore location as a way to evade some of the more stringent reporting now required in the U.S. market. Even worse, there have allegedly been instances in the past when Tether apparently had "ghost reserves" that didn't actually exist.

Image source: Getty Images.

So here's my thinking: Big-time institutional investors in the U.S. that want to get involved with stablecoins are probably going to opt to use USDC, out of an abundance of caution. Historically, USDC has been considered more transparent and more compliant with U.S. regulatory frameworks than Tether. Granted, Tether is more liquid than USDC, and has less slippage on its dollar peg than USDC (which makes it very useful for high-frequency traders), but it also carries more regulatory risk.

3. New use cases for consumers and businesses

Finally, USDC can steal a march on Tether by growing the number of possible use cases for consumers and consumer-facing businesses. For example, The Wall Street Journal recently reported that both(NASDAQ: AMZN) and(NYSE: WMT) are considering the launch of stablecoins as a payment option for consumers. If these consumers use stablecoins, Amazon and Walmart can cut down on their credit card processing fees, saving them money.

So that seems like another way for Circle to grow faster than Tether: go all-in on stablecoins as an innovative new payment option, signing up as many partners as possible. In June, for example,(NASDAQ: SHOP) signed up as a USDC partner. Circle is also working with Coinbase to increase usage of USDC as a potential payment option at consumer-facing businesses.

When will USDC pass Tether?

A lot has to go right for USDC to pass Tether in terms of market cap. But, if all goes according to plan, this might actually happen soon if USDC doubles in size each year, while Tether continues to grow at a steady 10% rate. If this ultra-optimistic scenario plays out, then USDC might be able to narrow the $100 billion gap with Tether within the next 24 months.

So, while there are a growing number of Circle naysayers out there, I'm not one of them. If you are looking to capture any potential upside from the rapid growth of the stablecoin market, you might think about adding some Circle to round off your portfolio.