Fact Check: USD Coin is the largest regulated stablecoin in the world

August 7, 2021 Coinbase

We all need to work together to move crypto adoption forward, and it’s important that we all start with facts. So we have to correct the record after reading the article titled “A Regulated Stablecoin Means Having a Regulator” by Dan Burstein, Chief Compliance Officer of Paxos. In case you missed it, the article was an inaccurate attack on USDC (market cap: $27.5B) which is minted by CENTRE (a consortium of which Coinbase and Circle are members). USDC is one of several alternatives to the stablecoin issued by Paxos (market cap: $900M). Coinbase remains coin agnostic and supports many stablecoins on our platform, including Paxos and USDC. However we felt it important to share this post in our effort to fact check misinformation and mischaracterizations about crypto. Let’s get started.

“Neither USDC nor Tether is a regulated digital asset, for the simple reason that neither token has a regulator.”

Fact Check: USDC is indeed regulated. USDC is regulated as a stored value instrument (just like a pre-paid card). Stored value products are regulated under state money transmission laws. As the issuer of USDC, Circle is subject to oversight by 46 state regulators, which conduct frequent exams of Circle’s activities.

“In fact, neither USDC nor Tether tokens are “stablecoins” in anything other than name. These tokens are backed by illiquid and risky debt obligations — a critical weakness that no prudential regulator would allow to exist as this creates undue risk for their customers.”

Fact Check: The assets backing USDC are prescribed by the state regulators which provide companies like Circle a list of permissible investments in which the USD backing USDC can be invested. Here is an example from the state of California. These are the same laws that protect the fiat money customers hold at Coinbase or Paypal. These laws are essentially customer protection laws, designed with the clear purpose of ensuring that the stored value is safe. (You can see the make-up of the assets backing USDC here — they all have investment-grade credit ratings.)

“Proper regulation of financial services firms — which must include comprehensive oversight of the products and services offered by those firms — is the only way to protect clients and customers. What does that mean tangibly? There is direct oversight of client protections, resolution planning if there is a failure, privacy protections, consistent reserving practices plus audits and exams to verify this.

Fact Check: Regulation is key. Circle, the issuer of USDC is a money services business registered with FinCEN and 46 state regulators. Reserves are reported to the states pursuant to money transmission laws. Circle, and hence the reserve, is audited by Grant Thornton, a leading global accounting firm. You can find Circle’s 2020 audited financial statements here. Further, every month, Grant Thornton attests (i.e., verifies publicly) that the reserve balance equals the USDC in circulation. You can find those attestations here.

“The issuer can (and often does) use consumer funds to pursue risky high-yield investments for its own financial gain.”

Fact Check: Nope, not USDC. State Permissible Investment requirements address this risk. The USDC reserve contains no high-yield investments.

“In the case of USDC, reserves are held on Circle’s balance sheet, implying that Circle views USDC reserves as its own property.”

Fact Check: Many issuers of stored value instruments report the reserve assets on balance sheet, this is a common and acceptable accounting practice and should not be misunderstood to mean that Circle views USDC reserves as its own corporate property. The key to test this is to verify that an offsetting liability to the asset is also reported. In Circle’s publicly-filed financial statements you can clearly see that the reserve is “segregated for the benefit of USDC holders,” and that there is a corresponding liability of “Deposits from USDC holders,” making clear that the funds belong to the holders of USDC.

Summary:
Coinbase encourages its customers and all crypto market participants to research the cryptocurrencies they transact with. Stablecoins have different reserves and customers should pay attention to those reserves. USDC is regulated and has reserves that comply with state licenses and have a proven record of stability.

Fact Check: USD Coin is the largest regulated stablecoin in the world was originally published in The Coinbase Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

FACT CHECK: Is Bitcoin mining environmentally unfriendly?

May 24, 2021 Coinbase

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As Bitcoin has become increasingly mainstream, questions about how it works have naturally arisen among both investors and the general public. One of those questions is about the potential environmental impact of mining, which is the process the blockchain uses to generate new bitcoin and verify transactions.

First, a basic fact: Bitcoin mining is an energy-intensive process. There’s no debate about that. As prices climb, new miners are incentivized to participate, which drives up energy usage (at least until the next halving, when the amount of new bitcoin issued will be reduced by half).

But teasing out the actual environmental impacts of that energy use is, like a lot of things, complicated. In this post we’ll look at some of the major concerns that are often raised, and see how much truth there is to them.

Myth: Bitcoin is a significant contributor to climate change

According to the best available science, this simply isn’t true. While Bitcoin’s energy consumption is significant, that doesn’t automatically equate to it being a meaningful driver of climate change. To understand why, it helps to know a little about how mining works.

Mining is the process that Bitcoin and some other cryptocurrencies use to generate new coins and verify new transactions. Vast, decentralized networks of computers around the world secure blockchains (the virtual ledgers that document cryptocurrency transactions). In return for contributing their processing power, miners are rewarded with new coins. It’s a virtuous circle: the miners maintain and secure the blockchain, the blockchain awards the coins, and the coins provide an incentive for the miners to maintain the blockchain.

In April, there was a flurry of headlines warning that emissions from Bitcoin mining in China could push global warming out of control. But the report these articles were based on was deeply flawed. The numbers were derived from the mix of fuels used by China as a whole — not the actual energy mix used by miners. Because much of China’s electric grid is powered by coal, these researchers then assumed that Bitcoin must be equally coal-dependent. Here’s why that’s inaccurate:

The Facts:

Miners are incentivized to find the cheapest energy sources available. That generally means excess power (electricity that would otherwise be wasted) and/or sustainable energy, which is plummeting in price.
Half of global mining takes place in Sichuan, China, where excess hydroelectric power allows mining to be fueled by 95% renewable energy.
75% of miners already use renewable energy as part of their energy mix.
Most important of all, the researchers behind the Cambridge Bitcoin Electricity Consumption Index have concluded that “Bitcoin’s environmental footprint currently remains marginal at best.”

Myth: Bitcoin is incompatible with a healthy environment

As both crypto and green-energy technology mature, the reverse scenario is seeming more likely. Bitcoin miners are incentivized to go where power is cheapest. While that can mean some use of fossil fuels, the best way for miners to maximize profits is to find places with excess supply. In fact, Bitcoin is uniquely well-positioned to help make renewable energy cheaper and more accessible for everyone:

The Facts:

Renewable energy sources tend to have excess supply. When the grid can’t support that power supply, the power goes to waste.
Natural gas producers use a process called “flaring” to simply burn excess production, harming the environment and benefiting nobody. Bitcoin can convert this excess energy into value with no net increase in emissions.
By placing mining operations at the source of green energy, utilities can monetize their excess supply. In fact, at least one publicly-traded power company has explored participating directly in mining to capture value from excess supply that can be used to build out sustainable-energy operations.
By ensuring viable markets for renewable energy, Bitcoin incentivizes companies to build more green infrastructure, which further drives down the price of clean power. This virtuous cycle can actually contribute to the fight against climate change.

Myth: Bitcoin is inherently less efficient than traditional financial systems

Many of the most alarming headlines come from a basic lack of understanding around how Bitcoin works. You might hear startling claims like, “Bitcoin would require 14x the world’s total electricity just to process the 1 billion credit card transactions that take place every day.” These numbers tend to come from conflating the energy cost of mining Bitcoin with the cost of transactions.

The Facts:

Energy consumption comes primarily from mining blocks on the blockchain, not from transactions. (The “mining” process accomplishes multiple goals — including both the generation of new bitcoin and the verification of new transactions. But the primary function of mining, as the name suggests, is generating new bitcoin.)
The energy required to mine a block is expected to decrease every 4 years due to a process known as the halving, where new Bitcoin issuance is cut in half.
The energy spent is per block, not per transaction. As tools (like batching, Segwit, and the Lightning Network) allow parties to aggregate more transactions per block, energy costs per transaction will decrease.

Myth: Bitcoin uses “too much” energy

Because Bitcoin is relatively new, the idea that it consumes as much energy as a country like Norway can seem shocking. But consider this: Norway’s GDP is around $400 billion. The total economic value that Bitcoin secures (its market capitalization) has been as high as $1 trillion. It’s not easy to make a direct comparison, but the important thing to remember is that everything uses energy. Whether that use of energy is considered justified or not depends in large part on the value that’s derived from the use of resources. And by that measure, Bitcoin is a substantially more efficient user of resources than many industries. Here’s some perspective:

The Facts:

The energy wasted by on-but-inactive household devices each year in the US alone could power bitcoin mining for 1.5 years.
Bitcoin has been found to consume far less than other financial systems: half that of the gold mining industry and less than one fifth of bank branches and ATMs.

Myth: The crypto space isn’t addressing environmental impacts

As the biggest cryptocurrency, Bitcoin is often treated as a stand-in for the entire crypto space. This ignores the upgrade being currently made by the second-biggest cryptocurrency, Ethereum. The ETH2 upgrade is designed to make a vast range of economic activity — from lending and saving to minting NFTs — greener, cheaper, and faster.

Similarly, newer cryptocurrencies like Cardano are designed from the bottom up with sustainability in mind.

And when it comes to mining, the major stakeholders in the space are actively incentivizing the sustainable sourcing of energy in a variety of ways — including the launch earlier this year of the Crypto Climate Accord, which aims to reach 100% sustainable-energy production by 2025.

The Facts:

Elon Musk, who recently tweeted that Tesla would suspend accepting bitcoin as payment over fossil-fuel concerns, met with the biggest North American mining companies (including Argo Blockchain, Hive Blockchain, and Riot Blockchain) on May 23. Following the meeting, the mining firms announced the formation of the Bitcoin Mining Council — a consortium that aims to accelerate the adoption of sustainable-energy mining worldwide.
Ethereum is currently undergoing an upgrade which is moving the second-biggest cryptocurrency by market cap from a mining-based system to a more energy-efficient system called proof of stake. Proof of stake is already used by many cryptocurrencies.
Square recently announced a $10 million Bitcoin Clean Energy Investment Initiative to promote the use of clean energy in the mining of Bitcoin.
Just in the last week or so, several major mining firms announced green initiatives: Greenidge Generation Holdings said its New York Bitcoin mining operation would become carbon neutral on June 1. And Argo Blockchain announced new operations in Canada using mostly hydroelectric power.
Argo also recently joined mining firm DMG Blockchain in the Crypto Climate Accord (CCA). The CCA is an initiative launched by the private sector that pledges to help the mining industry to transition to 100% sustainable-energy production by 2025 and net-zero carbon emissions by 2040.
Coinbase Ventures recently invested in Crusoe Energy — a firm that harnesses natural gas producers’ excess “flare” energy for crypto mining and other productive uses.

FACT CHECK: Is Bitcoin mining environmentally unfriendly? was originally published in The Coinbase Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

FACT CHECK: Crypto is increasingly being used for criminal activity and is a haven for illicit…

May 6, 2021 Coinbase

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FACT CHECK: Crypto is increasingly being used for criminal activity and is a haven for illicit finance than cash

Because cryptocurrency is still new, we are often asked about the biggest myths surrounding it. It’s common for a new market or product to confuse people, until they get familiar with it. Think about Airbnb: the idea of staying in a stranger’s home seemed crazy until it didn’t.

One of the most widespread but false notions about crypto is that it is mostly used by bad actors for illicit financing.

“Cryptocurrencies have been used to launder the profits of online drug traffickers; they’ve been a tool to finance terrorism,” says Treasury Secretary Janet Yellen.

It’s a tool of “kidnappers and extortionists” that is “contrary to civilization,” according to Berkshire Hathaway Vice President Charlie Munger.

“Very few people are using Bitcoin to pay their bills, but some people are using it to buy drugs [or] subvert elections,” writes New York Times columnist Paul Krugman.

And President of the European Central Bank Christine Lagarde thinks it’s “a highly speculative asset which has conducted some funny business and some interesting and totally reprehensible money-laundering activity.”

This is false. Let’s look at a few key data points.

Myth #1: The majority of cryptocurrency transactions are for illegal activities.

The Facts:

Research shows that illicit activity accounts for less than 1 percent of transactions.
Of that small portion, scams make up the overwhelming majority of cryptocurrency related crime — not money laundering, terrorism, trafficking, or other unlawful activities.
From 2017 to 2020, criminal economic activity was overwhelmingly conducted through traditional financial institutions.

Myth #2: More illegal activity takes place using cryptocurrency than with cash.

The Facts:

Good old-fashioned cash continues to be the funding of choice for criminals.
The UN estimates that ~$1.6 trillion in cash is laundered each year
Meanwhile, criminal activity in cryptocurrency actually fell quite dramatically, from 2.1% in 2019 to less than half a percent in 2020.
Despite the perceived appeal of cryptocurrency for money laundering, an estimated 99 percent of cryptocurrency transactions are performed through centralized exchanges subject to the same AML/CFT regulations as traditional banks.

Myth #3: Cryptocurrency makes it harder for law enforcement to investigate malfeasance.

The Facts:

Crypto is easier to track because searchable public databases (blockchains) already exist for the majority of transactions. Even the Department of Justice says so.
This gives law enforcement access to substantially more information than a case involving cash, including the date, time, and amount of the transaction, as well as the type of crypto used, the wallet address involved, and the unique transaction identifier (hash value).
Once that data is recorded in the blockchain, it cannot be altered retroactively, there is little risk of data loss, and confidentiality is maintained.
Immediately accessible with crypto, this kind of information can take law enforcement months or even years to obtain regarding cash transactions.

This data is already paying dividends to law enforcement, who has teamed up with private analytics firms to analyze blockchain transactions to identify individuals involved in illicit finance and pursue investigations into the dark web, child exploitation, and even terrorist financing.

These examples illustrate that crypto is not a haven for criminal activity or illicit financial dealings, but a medium for a wide range of secure, trackable transactions.

FACT CHECK: Crypto is increasingly being used for criminal activity and is a haven for illicit… was originally published in The Coinbase Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

FACT CHECK: Coinbase executive share sales

April 28, 2021 Coinbase

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Given the volume of conversation we’re seeing related to the crypto space, we think that it’s important to ensure that information being shared is accurate and contextualized. Moving forward, Coinbase will use our blog to share comments and corrections when we see material factual errors or mischaracterizations about Coinbase or crypto more broadly being shared in the press or on social media.

Over the weekend of April 17-18, 2021, we saw numerous pieces of misinformation spread about our investor and executive stock sales. We’d like to set the record straight.

When investors or executives sell their shares on a listing day — or at any other time — they file a Form 4 with the SEC. These filings are public and available to anyone. Unfortunately, they can be tricky to correctly interpret. Which is what may have led to misinformation being shared on Twitter.

It started with someone creating an erroneous chart:

This led to a false narrative that Coinbase executives were selling the majority of their stock when we listed on Nasdaq, which continued to spread on Twitter:

Here’s the truth:

Brian Armstrong, CEO, sold <2% of his total outstanding equity, not 71%
Alesia Haas, CFO, sold 15% of her total outstanding equity, not 100% as quoted in some reports
Emilie Choi, President and COO, sold 24% of her total outstanding equity
Surojit Chatterjee, Chief Product Officer, sold 8% of his total outstanding equity
Jennifer Jones, Chief Accounting Officer, sold 38% of total outstanding equity
Other execs’ selling percentages are accurately reflected in this piece and the Coinbase filings are listed on our investor site here

These percentages are consistent with executive stock sales in other recent Direct Listings*.

How did this misinformation happen? We’re not sure, but perhaps it’s confusion with the different types of equity that exist and how they’re reported. Class A and Class B shares, options, and RSUs are accounted for differently in different reports. In addition, if an executive did a same day exercise and sale, it looked as though they sold 100% of their shares as opposed to 100% of the shares exercised on the day.

The misinformation continued:

Again, false and harmful. In direct listings, there are no new shares offered. Existing shareholders need to sell portions of their total holdings to create a market, particularly in the first days of trading (as was the case here). This is different from IPOs (Initial Public Offerings) where new shares are offered as part of the listing so investors and executives are not relied upon to sell any shares to create supply for new investors.

Our Chief Legal Officer, Paul Grewal, explains:

Summary

Coinbase executives and early investors sold portions of their total holdings to create liquidity on the opening day of trading for Coinbase stock. These sales are critical to a direct listing. Despite misguided commentary on social media and in some news outlets, these sales represented small percentages of their overall holdings. Our executives and investors may continue to sell their holdings — or buy additional stock — at various points in the future. These transactions will always be publicly visible via SEC disclosures.

*Based on a review public disclosures of executive sales following the direct listings of Asana, Palantir, Roblox and Slack. Asana’s executive officers sold 1.67%; Palantir’s executive officers sold 7.29%; Roblox executive officers sold 4.21%; and Slack executives sold 4.18% of total executive officer holdings. Coinbase Section 16 officers sold 3.32% of total Section 16 officer holdings.

FACT CHECK: Coinbase executive share sales was originally published in The Coinbase Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

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