(Bloomberg) -- Preparing a company for an initial public offering is never an easy feat. Circle Chief Executive Officer Jeremy Allaire faces an especially daunting task. 

Circle’s main product, the crypto stablecoin USDC, is losing ground to chief competitor Tether’s namesake token, eroding its importance in digital-asset markets. Crypto executives and investors point to several reasons for the market-share loss, some of which could be hard for Allaire to quickly address. 

Circle has started talking to advisers as it considers an IPO that could take place early next year, Bloomberg News reported Nov. 7. Allaire declined to comment on IPO plans, saying in an interview that “we don’t need to raise capital.”

As Allaire likely hones his pitch to investors, USDC’s share of the $126 billion stablecoin market has tumbled to less than 19%, according to researcher CCData. That’s far below where it stood when Goldman Sachs Group Inc.-backed Circle called off its attempt to go public last December at a proposed valuation of around $9 billion.

Read more: Stablecoin Issuer Circle’s SPAC Deal With Concord Scrapped

“You want to stick some growth expectation in there, and most people think that growth expectation is negative,” said Chris Taylor, head of crypto at trading firm GSA Capital. “It’s still worth something, but it’s a tough sell.” 

Stablecoins like USDC and USDT — Tether’s trading ticker — are pegged to the dollar. They play a crucial role as gateways to cryptocurrency markets because they’re an intermediary step for using fiat money to buy tokens like Bitcoin, and vice versa. They’re also often used as collateral for crypto loans. PayPal Inc. this year launched an own-branded stablecoin intended for use in payments.

Circle and Tether make money from investing the reserves backing their stablecoins — $24 billion and $87 billion, respectively — in assets like Treasuries. That’s become a more lucrative business model as the Federal Reserve pushed interest rates higher to contain inflation. 

Rising yields meant Tether had worked up a reserves surplus of $3.2 billion as of Sept. 30, according to the company. It plans to invest part of that hoard in areas like Bitcoin mining. Meanwhile, Circle’s $779 million in first-half revenue surpassed its total for 2022.

Different Paths 

Beyond those dollar links, differences between USDC and Tether abound. And those discrepancies help explain why Tether has the upper hand for now.

Circle is based in Boston and Tether is registered in the British Virgin Islands. USDC is widely used in the US through exchanges like Coinbase Global Inc., which owns a minority stake in Circle. As yields on US Treasuries soared toward 5%, many USDC holders swapped it for dollars to take advantage of those high returns, said Kyle Samani, co-founder of crypto investor Multicoin Capital.

“Most people who have access to USDC have access to US dollar bank accounts, so they naturally convert USDC to USD to accrue that yield,” Samani said. “However, most people who are holding USDT do not have access to USD bank accounts, so they don’t care about the foregone yield.” 

In the past, Tether has used Deltec Bank & Trust Ltd., Britannia Bank & Trust and Capital Union Bank, all of which are based in the Bahamas.

“Tether has grown its market share in the real world,” the stablecoin issuer said in a statement. “As stated before, Tether USDT represents 80% of cryptocurrency transactions in many countries. USDT is the tool of choice of the masses.”  

SVB Collapse Fallout

Its close ties to the US banking system have hurt Circle in more ways than one. The March collapse of Silicon Valley Bank, where a part of USDC’s reserves were parked, triggered a run on the stablecoin which caused it to deviate from the dollar peg for several days. 

While Circle got money that was trapped at SVB back within days, its credibility took a hit. USDC’s circulation tumbled by more than $10 billion in a month and has kept on falling.

“When we talked to several market makers, there was a lack of trust against USDC from that trauma during the banking crisis,” said Eliezer Ndinga, head of research at asset manager 21.co. Market makers are among the biggest users of stablecoins. Meanwhile, Tether’s market cap hit an all-time high of $87 billion on Nov. 14.

Not everyone is pessimistic. Crypto prices have soared this year, with Bitcoin more than doubling in value to the highest since before the TerraUSD stablecoin imploded in May 2022. Trading volumes are showing signs of picking up. 

Circle ended the second quarter with more than $1 billion in cash, which Allaire had said he plans to use to counter competition from the likes of PayPal. It has several high-profile investors, with BlackRock Inc. and Marshall Wace LLP having put money into the firm in addition to Goldman.    

Efforts by the US to introduce legislation around stablecoins could also boost USDC, said Matt Hougan, chief investment officer at crypto investor Bitwise Asset Management. 

“The tailwind from the market growth will overwhelm a lower take rate, any variability in interest rates,” Hougan said. “They are already a good business, generating real revenue.” 

Coinbase in September started offering 5% yield for traders who hold USDC on the platform, more than what 10-year Treasuries currently yield — although that hasn’t halted the decline in market share, per CCData.

Under a new revenue sharing agreement between Circle and Coinbase announced in August, the companies will equally share interest income generated from broader usage of USDC. Circle previously got about 60%, according to John Todaro, an analyst with Needham & Co. That Circle had to settle for a lower share raises questions about its longer-term profitability, especially if interest rates start falling. 

Seamless Redemptions

One obstacle to reclaiming market share from Tether stems from USDC’s user-friendly design. 

Circle’s mechanism for redeeming USDC for dollars, known in crypto parlance as an off-ramp, is seamless. The minimum amount is $100, settled via bank wire at no fee. Investors who want to redeem Tether directly with its issuer face a much steeper hurdle: a minimum $100,000 withdrawal at a fee of 0.1% or $1,000, whichever is higher. 

To take out dollars this way, they must first have accounts at one of Tether’s Bahamas-based banks, according to crypto investment firms Fasanara Digital and DACM. 

As a result of the differences, a popular method among those looking to cash out from crypto is to swap Tether for USDC and then trade the stablecoin for cash over on Coinbase, which charges no fee for such transactions, said Fasanara Digital partner Nikita Fadeev. That helps explain the persistent pressure on USDC’s market capitalization, according to Fadeev.  

“Until USDC’s market share stabilizes, I’m not sure there’s going to be any IPO,” said Matthew Sigel, head of digital-asset research at VanEck Associates.

Allaire said in an interview on Wednesday that the differences between Circle and “some of our competitors” result in “a kind of market abnormality where people who use alternative stablecoins with limited market infrastructure, if they want to get in or get out, they will often use something like USDC.” 

Even so, “the strength of our infrastructure is going to be a very strong competitive advantage for us” over the longer term, he said. 

--With assistance from Suvashree Ghosh.

(Updates with comments from Circle CEO starting in third paragraph.)

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