Stablecoin issuer Circle made news at crypto shindig Consensus last week by announcing a Cross Chain Transfer Protocol (CCTP) to ensure “seamless liquidity” of their token USDC. In simple words, this means that the CCTP will enable USDC holders to move the token between different blockchains. According to the company, the CCTP is currently functional between Ethereum and Avalanche.  

“By avoiding the complications and risks of traditional “lock and mint” approaches, CCTP brings a highly secure and capital efficient way to transact with USDC in an increasingly multi-chain environment,” the company stated in a press release.  

Old Wine in A New Bottle

What’s old becomes new again. And so, it is in cryptocurrencies. Circle has packaged CCTP as a novel concept. It is not.

CCTP simply repackages the concept of a crypto bridge that caused much havoc in cryptocurrencies last year. Third parties like Wormhole, which operated bridges earlier, have become infrastructure providers for USDC’s CCTP. The workings of the concept, however, remain the same.

In a bridge transaction, users deposit their token on one chain in a smart contract and receive a synthetic token, a wrapped version of the coin being transferred, on the other chain. Only after the token on the original chain is burnt i.e., removed from existence, are the destination tokens released.

The operations of CCTP are similar. A wrapped version of USDC will be issued before it is minted on the destination chain and USDC will be burned on the original chain. USDC can be natively minted on Ethereum, Avalanche, Solana, TRON, Algorand, Stellar, Flow, and Hedera.  

An Illiquid Smart Contract Token  

During an interview, Circle CEO Jeremy Allaire claimed that CCTP would improve USDC liquidity. But USDC is hardly used for trading or other activities that require liquidity.

Out of USDC’s circulating supply of 30.5 billion, only 2.84 billion trades at centralized and decentralized exchanges based on data from Coinmarketcap. The rest is locked in smart contracts or used as collateral. In fact, the biggest holder of the token is MakerDAO, which backs its DAI stablecoin with USDC.     

USDC’s future liquidity will depend on the chains where it is minted. CCTP is useless if the chains are regulated out of existence. That is an increasingly likely possibility given recent developments.   

“USDC is always on,” Allaire told CNBC. Except when it is not. Circle suspended USDC redemptions after the stablecoin lost its peg to the US dollar due to exposure to the troubled Silicon Valley Bank. Its hopes of getting access to Fed funds were also recently dashed by the New York Fed after the agency wrote that funds “organized for a single beneficial owner” will not be eligible to become Reserve Repo Counterparties (RRP).