Circle: Currently researching "reversible" transactions for stablecoins, aiming to learn lessons from the traditional financial system

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 move in a media interview. He stated, "Establishing a mechanism that allows refunds in cases of fraud or disputes will help the stablecoin industry become part of mainstream finance." Tarbert acknowledged that there is an "inherent tension" between the finality of instant transaction settlement and the reversibility of transactions.

This statement marks a significant shift in the attitude of the crypto industry. For a long time, the industry has tried to distance itself from so-called "traditional finance" (TradFi), and the "immutability" of transactions has been seen as a core advantage of blockchain technology. For some staunch supporters of cryptocurrencies, Circle's exploration is almost "heretical," with one prominent venture capitalist even calling it "offensive" to still refer to Circle's planned projects as blockchain.

This move comes as the U.S. paves the way for the widespread use 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 may make its stablecoin a more attractive option, thereby accelerating the "stablecoin gold rush" predicted by institutions like Goldman Sachs.

Saying Goodbye 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 that has been seen as a reflection of its technological superiority.

Tarbert, who previously served as the chairman of the U.S. Commodity Futures Trading Commission (CFTC), stated that while people often say blockchain technology is superior to existing systems in many ways, "some benefits of the existing (traditional finance) system are not necessarily present in the current (crypto world)." He revealed that discussions are ongoing among software developers about whether a certain degree of fraud transaction reversibility can be achieved on specific blockchains, under the condition that all relevant parties agree.

This departure creates a divergence between Circle and the fundamentalists of the crypto world, but it may win favor with traditional financial institutions. By introducing risk control and error correction mechanisms similar to traditional finance, Circle aims to lower the barriers for institutional investors to enter the field.

Circle's concept of "reversible transactions" will primarily be realized through its newly designed blockchain for financial institutions, Arc. However, Circle clarified that this mechanism does not involve directly reversing or undoing transactions on the blockchain.

Specifically, payments on the Arc chain cannot be directly undone. Instead, Circle plans to add a protocol layer that allows the parties involved in a transaction to conduct a "reverse payment" once they reach an agreement, similar to the refund process in credit card transactions. This move aims to balance the finality of transactions with the need for error correction Currently, Circle is testing the Arc chain, aimed at enabling companies, banks, and asset management firms to use stablecoins for payment activities such as foreign exchange trading. However, since its inception, the Arc chain has faced some criticism, with some executives and developers believing it is too centralized, contradicting the original intention of blockchain technology to bypass intermediaries like banks.

Targeting Institutional Clients: Balancing Privacy and Compliance

Circle's strategic focus is clearly on attracting banks and large institutional investors, contrasting sharply with the strategy of Tether, the world's largest stablecoin issuer. The latter has established its market dominance by focusing on high-frequency cryptocurrency trading and providing dollar alternatives in emerging markets.

To cater to the strict confidentiality requirements of institutional clients regarding financial information, Circle is also exploring options to provide users with 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 want... the whole world to see every transaction, so we created a confidentiality layer to hide the amounts."

Regulatory Tailwinds and the "Stablecoin Gold Rush"

Circle's transformation is taking place against a favorable macro backdrop. The U.S. is gradually establishing a regulatory framework for the stablecoin industry, with Congress passing a landmark bill in July to regulate the sector. At the same time, reports indicate that the Trump administration is also strongly supporting the development of stablecoins, hoping to extend the influence of the dollar 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 approximately $280 billion. Goldman Sachs predicted in an August report that the industry is at the beginning of a "stablecoin gold rush," estimating that the market capitalization of USDC issued solely by Circle could grow by $77 billion by 2027.

Regarding the sources of inflows, Tarbert stated that he is uncertain but attempted to downplay banks' concerns about deposit outflows. He believes that while people "could" transfer demand deposits into stablecoins, funds "could very well" flow in from other asset classes, and it is even "entirely possible to create new wealth."