What Happens to USDC Reserves If Circle Goes Bankrupt?

By Stacy Elliott

USDC issuer Circle’s “moon landing moment” of its IPO and subsequently soaring stock price do little to change the stability of its flagship stablecoin, S&P Global analysts told Decrypt. But questions remain over what might happen if the publicly traded issuer were to go bankrupt.

“The IPO is completely neutral to the stablecoin stability assessment,” S&P Global Ratings analyst Muhammad Damak told Decrypt.

“Going public is not really changing any of the key metrics or issues that we follow for the SSA,” Damak’s fellow S&P analyst, Lisa Schroeer, added. “The clarity that matters most is likely to come from legislation, not corporate structure.”

The S&P analysts were very careful not to use Circle and USDC interchangeably. The former is a publicly traded company and the latter is its flagship stablecoin, which is governed by smart contracts on chains including Ethereum and Solana.

And, if USDC works as intended, then its reserves would survive the demise of its issuer. But that’s where the uncertainty creeps in, and why USDC was docked a point on its stablecoin stability assessment in December.

“The stablecoin stability assessment could improve if there is increased certainty regarding the segregation and bankruptcy remoteness of the reserve assets, and assets remain very strong,” the S&P analysts wrote in their assessment.

Bankruptcy remoteness means that certain assets—in this case, the reserves backing a stablecoin—are legally protected so they can’t be used to satisfy corporate debts in the event of bankruptcy.

It’s worth noting that Circle hasn’t tried to hide this ambiguity from investors or USDC holders. A Circle spokesperson told Decrypt that reserves are held in bankruptcy remote accounts. That means they “should remain the property of stablecoin holders, not Circle or its creditors,” they said in an email.

But there’s not yet enough legal precedent to guarantee that’s how things would go down.

“Courts have not yet considered the treatment of underlying reserve assets in the context of a bankruptcy or insolvency of a stablecoin issuer, and have only issued a limited number of rulings related to digital assets in the context of a bankruptcy or insolvency,” Circle noted in a June 5 prospectus filed with the SEC.

The company writes even more plainly in the same filing: “There is not complete certainty in a stablecoin holder’s claim to reserve assets in the event of bankruptcy or insolvency.”

At least some of this can be chalked up to Circle being one of the earliest stablecoin issuers, and the first ever to be listed on the New York Stock Exchange. But without a similar company bankruptcy to establish some legal precedent, the S&P analysts say they’re watching progress on the GENIUS Act.

The legislation would create federal oversight for payment stablecoins and set clear rules for how their reserves are managed. And, crucially, it would amend the U.S. Bankruptcy Code so that stablecoin holders get priority access to the cash backing their tokens in the event of bankruptcy.

“That’s exactly where legislation would help—making absolutely clear that if the company fails, the money backing the stablecoin is still safe and redeemable,” S&P’s Schroeer said.

And for what it’s worth, Circle wants to see its USDC holders given those protections.

“These provisions are a critical step toward enshrining in law what we already practice,” the Circle spokesperson added, “that stablecoin holders should be first in line, not left in the cold.”

Edited by Andrew Hayward

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