Circle: Exploring "reversible" stablecoin transactions, aiming to learn lessons from the traditional financial system

Circle also plans to implement "reverse payments" at the protocol level through its new blockchain, Arc, to balance transaction finality with the need for error correction.

Written by: Zhang Yaqi

Source: Wallstreetcn

As the world's second-largest stablecoin issuer, Circle is exploring the introduction of a "reversible" mechanism for its token transactions.

Circle President Heath Tarbert recently revealed this development in a media interview. He stated that establishing a mechanism allowing refunds in cases of fraud or disputes would help the stablecoin industry become part of mainstream finance. Tarbert acknowledged that there is an "inherent tension" between achieving transaction finality with instant settlement and transaction reversibility.

This statement marks a significant shift in the crypto industry's attitude. For a long time, the industry has sought to distinguish itself from so-called "traditional finance" (TradFi), with the "immutability" of transactions regarded as a core advantage of blockchain technology. For some staunch cryptocurrency supporters, Circle's exploration is almost "heretical." A well-known venture capitalist even called it "offensive" to still refer to Circle's planned project as a blockchain.

This move comes as the United States is paving the way for the widespread adoption of stablecoins, with banks and credit card companies exploring blockchain technology. For investors and financial institutions seeking safer and more compliant digital assets, Circle's exploration could make its stablecoin a more attractive option, thereby accelerating the "stablecoin gold rush" predicted by institutions such as Goldman Sachs.

Farewell to "Immutability": A Major Shift in the Crypto World

Circle's latest exploration directly challenges the cornerstone of blockchain "immutability." As a public digital ledger, transactions recorded on the blockchain cannot be reversed once confirmed, a feature long seen as a testament to its technological superiority.

Tarbert, who previously served as Chairman of the U.S. Commodity Futures Trading Commission (CFTC), stated that although people often say blockchain technology is superior to existing systems in many ways, "some of the benefits of the existing (traditional financial) system are not necessarily present in the (crypto world) at the moment." He revealed that discussions are underway among software developers to explore whether, on specific blockchains and under certain circumstances with the consent of all parties involved, some degree of fraud transaction reversibility can be achieved.

This divergence has created a rift between Circle and crypto purists, but it may win favor with traditional financial institutions. By introducing risk control and error correction mechanisms similar to those in traditional finance, Circle aims to lower the entry barriers for institutional investors in this field.

Circle's concept of "reversible transactions" will mainly be realized through its new blockchain Arc, designed for financial institutions. However, Circle clarified that this mechanism does not directly revoke or reverse transactions on the blockchain.

Specifically, payments on the Arc chain cannot be directly reversed. Instead, Circle plans to add a protocol layer that allows parties to a transaction, upon mutual agreement, to initiate a "reverse payment," similar to the refund process in credit card transactions. This move aims to balance transaction finality with the need for error correction.

Currently, Circle is testing the Arc chain, aiming to enable companies, banks, and asset management firms to use stablecoins for payment activities such as foreign exchange transactions. However, since its inception, the Arc chain has faced some criticism, with some executives and developers arguing that it is overly centralized and goes against the original intention of blockchain technology to bypass intermediaries such as banks.

Targeting Institutional Clients: Balancing Privacy and Compliance

Circle's strategic focus is clearly on attracting banks and large institutional investors, which stands in stark contrast to the strategy of Tether, the world's largest stablecoin issuer. The latter has established its market dominance by focusing on high-frequency crypto trading and providing a dollar alternative in emerging markets.

To cater to institutional clients' strict requirements for financial information confidentiality, Circle is also exploring options for users to choose the level of transaction transparency. On its Arc chain, while clients' anonymous wallet addresses remain visible, the amounts transferred will be encrypted. Tarbert explained:

"If you are a financial institution or serving clients, when you send funds, you may not necessarily want... the whole world to see every transaction, so we have created a confidentiality layer to hide the amounts."

Regulatory Tailwinds and the "Stablecoin Gold Rush"

Circle's transformation comes amid favorable macro conditions. The United States is gradually establishing a regulatory framework for the stablecoin industry, with Congress passing a landmark bill to regulate the sector in July. Meanwhile, it is reported that the Trump administration is also strongly supporting the development of stablecoins, hoping to use them to expand the dollar's influence into new markets.

Financial services companies are viewing stablecoin technology as a potential means to achieve faster and lower-cost cross-border payments. Currently, the total value of stablecoins in circulation globally is about $280 billions. In an August report, Goldman Sachs predicted that the industry is at the beginning of a "stablecoin gold rush" and estimated that the market value of USDC issued by Circle alone could grow by $77 billions by 2027.

As for the sources of capital inflows, Tarbert said it is still uncertain, but he sought to downplay banks' concerns about deposit outflows. He believes that although it is "possible" for people to transfer demand deposits into stablecoins, funds "could just as easily" flow in from other asset classes, or even "entirely new wealth could be created."