Visa Partners With Ethereum Digital-Dollar Startup That Raised $271 Million
Credit card giant Visa announced it is connecting its global payments network of 60 million merchants to the U.S. Dollar Coin (USDC) developed by Circle Internet Financial on the ethereum blockchain. The digital currency is now valued at $2.9 billion.
While Visa itself won’t custody the digital currency, effective immediately, the partnership will see Circle working with Visa to help select Visa credit card issuers start integrating the USDC software into their platforms and send and receive USDC payments. Circle itself is also going through the same Fast Track program. In turn, businesses will eventually be able to send international USDC payments to any business supported by Visa, and after those funds are converted to the national currency, spend them anywhere that accepts Visa.
After Circle itself graduates from Visa’s Fast Track program, likely sometime next year, Visa will issue a credit card that lets businesses send and receive USDC payments directly from any business using the card. “This will be the first corporate card that will allow businesses to be able to spend a balance of USDC,” says Visa head of crypto Cuy Sheffield. “And so we think that this will significantly increase the utility that USDC can have for Circle’s business clients.”
The partnership, in conjunction with an earlier $40 million investment Visa led in a cryptocurrency startup for holding similar assets issued on a blockchain, a recent blockchain patent application for minting traditional currency on a blockchain, and an increasing amount of work directly with central banks, is the latest evidence that the credit card giant sees the technology first popularized by bitcoin as a crucial part of the future of money.
“We continue to think of Visa as a network of networks,” says Sheffield, a five-year veteran of Visa, who took over as head of crypto last June. “Blockchain networks and stablecoins, like USDC, are just additional networks. So we think that there’s a significant value that Visa can provide to our clients, enabling them to access them and enabling them to spend at our merchants.”
Leading up to the partnership, Visa had already onboarded 25 cryptocurrency wallet providers as part of its Fast Track program—including Fold and Cred— each of which can now pilot the USDC integration. Going forward, other cryptocurrency wallet providers like BlockFi, which yesterday announced it will launch its bitcoin rewards Visa next year, will be able to use USDC in the first quarter of 2021.
Visa estimates that $120 trillion in payments annually are made using checks and instant wire transfers, costing as much as $50 each, regardless of the size of the transaction. Since USDC settles on the ethereum blockchain, transactions can close in a little a[s] 20 seconds and, importantly, can be done for nearly free, Visa believes its vast array of merchants could choose to use this nearly instant alternative form of payment. “We worked closely with digital currency wallets to issue Visa credentials,” says Sheffield. “And helping them receive USDC payouts can add additional value for them.”
Visa’s entrance into the digital dollars world is the culmination of two years of work at the credit card giant. At the core of Visa’s evolution is a new understanding of itself as a network of networks, according to Sheffield, some of which Visa owns, like Visa Net, and others it doesn’t, such as the Swift interbank payment network, local ACH networks and now USDC.
On the product side, Visa’s cryptocurrency work is largely focused on its Fast Track program for helping companies obtain credentials for issuing Visa credit cards. Most notably, in February 2020, Coinbase became the first cryptocurrency company to be granted principal membership status by Visa, meaning it can in turn issue cards to others. Relatively few of those companies are using crypto-assets like bitcoin, according to Visa’s global head of financial technology, Terry Angelos. While the majority of the crypto-plays consist of “tokenized versions of fiat,” similar to USDC, backed by traditional currency, issued on a blockchain and spendable via the card.
On the research side, Visa’s work in the area is largely focused on investing in startups and filing patents. Last year, Visa made its first public investment in blockchain by coleading a $40 million Series B in digital currency infrastructure provider Anchorage, which builds technology for storing assets issued on a blockchain. Angelos compares the investment to Visa’s 2015 backing of e-commerce infrastructure provider Stripe, which could go public this year at a $36 billion valuation. While Anchorage is a much earlier-stage startup, founded in 2017, the firm has already developed a number of technological breakthroughs, including privacy-preserving technology called Zether, which JPMorgan used in its own cryptocurrency project.
Especially relevant to today’s news, Sheffield describes Anchorage’s cryptocurrency custody technology as a possibly crucial component for central banks looking to issue digital currencies (CBDCs). While stablecoins like USDC are backed by currency issued by a central bank, a CBDC would be issued directly by the central bank and could lead to a reimagining of traditional finance. While former JPMorgan exec Daniel Masters argues CBDCs could make commercial banks unnecessary, Sheffield says they’ll still have a place in the future of currency issued on blockchains. “We are actively working with commercial banks to help them understand and navigate transitions to digital currency based products.”
On a related note in March 2020, Visa’s research team applied for a patent for technology that could be used by central banks to issue any fiat currency, of which dollars, yen and renminbi are an example. At the time, a spokesperson indicated that the technology was as likely to be used for the creation of a new product, as it was to “protect” its existing businesses. Sheffield further clarified: “We are continuously exploring and filing patents for innovative technologies like digital currency and CBDC.”
On their way to today’s announcement, both Visa and Circle have undergone a number of high-profile crypto-pivots. In October 2019, after making a huge bang by being a member of Facebook-founded Libra Association’s consortium of companies building a stablecoin backed by a basket of fiat currencies, Visa left the organization. That same month, Circle, which has raised $271 million in venture capital, initiated a fire sale on two of its most valuable assets, starting with cryptocurrency exchange Poloniex, followed by Circle Invest in February 2020. Another product, Circle Pay, no longer lets customers buy or sell bitcoin or any other cryptocurrency and its once-vaunted OTC desk is closed.
As all this was happening, the firm, whose full name is, tellingly, Circle Internet Financial, rebranded its home page with a focus exclusively on stablecoins and central bank digital currencies. Circle founder Jeremy Allaire, whose last company, online video site Brightcove, went public in 2012 and is now valued at $659 million, envisioned the company as a payment rail for the internet. While his focus was initially on bitcoin, then other cryptocurrencies, USDC is built on top of ethereum, meaning tiny amounts of the cryptocurrency ether are used as “gas” to pay for the transactions. While the drastic changes to the business are notable, the underlying mission appears to have remained the same.
USDC was first minted in September 2018. Unlike bitcoin, it is backed 1:1 by U.S. dollars, which are audited by accounting firm Grant Thornton to ensure the actual amount of the asset in circulation is at least equal to the dollars backing the assets. While exchanges and marketplaces that directly accept USDC as payments (without Visa or another card provider) are responsible for their own AML-KYC compliance, reserves are governed by the nonprofit Centre Consortium founded by Visa principal member Coinbase and Circle, with other members forthcoming. To help manage all this and open up membership to other companies, the consortium yesterday announced its first CEO, David Puth, the former leader of CLS Bank International, a similarly structured foreign exchange settlement consortium owned by 70 financial institutions.
The first use-case for stablecoins was as an on-ramp and off-ramp for bitcoin investors who wanted to enter or exit positions faster than traditional banks could do with dollars. USDC’s market cap, representing the total amount of dollars in circulation, has been rising with the price of bitcoin since March 2020, when bitcoin started an eight-month, 271% ascension to $19,134, according to CoinGecko. Over the same period, USDC has grown 525% to almost $3 billion today. While the first stablecoin, Tether, is still king with a market capitalization of $18 billion, a number of others are now also competing, including DAI at $1 billion and Binance USD at $662 million.
Then, this March, Circle started offering services to let businesses accept USDC as payment, similar to those that run on FedWire, Swift and ACH rails, starting at about $200 a month. But instead of taking up to three days to close, transactions denominated in USDC and other stablecoins close almost instantly. So far about 1,000 businesses including institutional traders, banks, neobanks, on-demand delivery companies and gaming companies have opened accounts. Allaire says he’s in talks with a number of financial institutions exploring USDC as a possible upgrade to their corporate treasuries.
In June 2020 Circle announced it would start issuing USDC on the faster Algorand blockchain, which settles on average in four seconds, as part of what it describes as a “multichain framework.” In rapid-fire succession the firm then announced the Stellar and Solana blockchains would also be used to issue USDC. Algorand and Solana issuances are already live, with Stellar issuances scheduled to be minted in Q1 2021.
While onboarding to crypto trading markets was the first stablecoin-use case, things are evolving. In March 2020 USDC was approved as a form of collateral for loans issued using the MakerDAO protocol, the industry leader of a new financial category called DeFi, or “decentralized finance,” where services typically offered by banks, like lending, are offered via open-source software that allows individuals to directly connect. Of the $14.5 billion now locked in DeFi platforms according to data tracking site DeFi Pulse, nearly 20% are on Maker, with nearly half of that, or about $403 million worth, now in the form of USDC.
Long before DeFi was called DeFi, though, it went by a different, more illuminative name: DAO, short for “Distributed Autonomous Organization.” After some early high-profile failures the concept was rebranded with the focus on finance. Even the name MakerDAO hearkens back to this earlier, if occasionally overshadowed vision for the future of organizations. Allaire describes that future as a world where everything from contractual agreements to the payment of taxes are built into plumbing that directly connects individuals and enterprises in a wide range of new kinds of business relationships.
“Imagine a capital marketplace that is for anyone who needs capital, or anyone who needs to offer capital that has the same efficiency that Amazon has for e-commerce, the same efficiency that YouTube has for content, effectively, capital markets with the efficiency of the internet, which is essentially zero,” says Allaire. “And that will ultimately return trillions of dollars in value back to the economy, it will reduce costs for every business in the world, it will accelerate the way in which individuals can participate in commercial activity and commerce activity, in conducting their labor and interacting with businesses around the world.”