Exiting Position – Circle Internet Group, Inc. (NYSE: CRCL)

We published our original thesis on CRCL in March of this year (link), citing the multi-trillion dollar opportunity available to the company in establishing the digital transfer of funds in cross-border payments, remittances, interbank transfers, and tokenized asset markets through CRCL’s USD stablecoin, USDC. Compared to competitors, USDC was extremely well positioned to act as the secure and compliant coin of choice for financial institutions worldwide, holding a majority market share in institutional environments and expanding rapidly through partnerships with Visa, Mastercard, Goldman Sachs, Commerce Bank, Deutsche Bank, Standard Charter, BNY, State Street, HSBC and MoneyGram to name a few. Circle also held (and still does hold) a strong strategic partnership with Coinbase for the sake of reaching tokenized asset markets of the future.

Circle’s revenues stem from the interest income earned on its short-term treasury reserves, reserves which are held at a 1:1 ratio with the amount of USDC issued to digital counterparties. As stablecoin demand grows rapidly in the coming decades, we anticipated USDC to capture an outsized portion of demand due to its compliant nature and positioning in strategic partnerships with relevant financial counterparties, while continually using network effects to subdue competitive pressures.

This morning, an announcement was made via joinopenstandard.com (link) that upheaved our thesis for CRCL. Open Standard, a non-profit startup announced this morning, plans to compete directly with USDC through its own USD stablecoin, OUSD. The company is jointly owned, operated, and governed by Visa, Mastercard, Coinbase, Stripe, BlackRock, and a laundry list of other major banks and financial institutions. OUSD coins will be minted by ownership partners and distributed to counterparties, with only very small fees being taken in order to cover operating costs (the non-profit model).

This is an existential threat to Circle’s business model, and almost completely removes any visibility into USDC demand growth in the medium to long term. The financial institutions backing Open Standard will likely direct the majority of their traffic to OUSD as compared to USDC, and can feasibly overcome USDC’s incumbency and network effects given the collaborative nature of ownership interest in Open Standard. For third-party stablecoin demand, OUSD can be offered at a preferential fee rate given its non-profit nature and institutions are likely to incentivize directing traffic to their own collective coin as compared to USDC, further adding to OUSD network effects. In short, we believe that OUSD will be the largest USD stablecoin in the long term as a result of institutional support, something which renders our previous CRCL thesis void.

In our original thesis, our analysis on the competitive forces in stablecoins largely focused on existing peers like Tether and single institution coins like JP Morgan’s JPM coin. These competitors, as well as new third-party entrants, still would not be able to pose a threat to USDC’s incumbency, as Tether has a poor record of compliance, and new entrants and single institution coins would not be able to undercut USDC’s network while maintaining margin. How OUSD differs, and how we see it overcoming USDC’s network effect, is through its collaborative nature. What was not reasonably foreseeable to us at the time of our original thesis publishing was that hundreds of large financial institutions would come together and collaborate on a solution that did not earn them money on a reserves basis, but simply one that offered their counterparties lower costs and thusly enabled higher volumes and greater control of stablecoin transfers as a whole. Given the market’s reaction in CRCL share prices this morning, we can also confirm that other shareholders had not yet considered this outcome.

Our position in CRCL does mark an overall loss, but following the Open Standard announcement we do not hold any confidence in our previous financial analysis or the competitive standing of the company going forward, making retaining any position in CRCL shares senseless. As is such, we have exited our position and will redistribute funds to higher conviction ideas.