Credit Risk Assessment of Circle (USDC Issuer)
Agio Ratings has published its first independent credit risk assessment of Circle, the issuer of the US dollar–denominated stablecoin USDC. The analysis evaluates the credit risk faced by USDC holders, using a probabilistic framework aligned with traditional credit markets. Based on this assessment, Circle’s ability to meet its redemption obligations on USDC is assigned an A-equivalent credit risk rating, indicating high credit quality.
Key Credit Risk Metrics
The assessment estimates Circle’s 12-month probability of default at 0.11%, where default is defined as the issuer’s inability to redeem all USDC in circulation in accordance with stated terms. Over longer horizons, cumulative default risk rises to 0.38% over two years and 0.92% over three years. Loss Given Default (LGD) for USDC holders is conservatively estimated at 20%, resulting in an expected loss of approximately 0.02% per annum. These metrics are broadly comparable to those of an unsecured exposure to an A-rated borrower in traditional credit markets.
Financial Profile and Reserve Management
Circle’s credit profile is primarily driven by its reserve management practices and operating model. USDC liabilities are backed by reserve assets held predominantly in the Circle Reserve Fund, an SEC-registered fund investing in short-dated US Treasuries and repurchase agreements, alongside allocations to cash and cash equivalents. These assets are managed and custodied by institutional providers and exhibit minimal market and credit risk.
From an issuer perspective, Circle’s revenues are largely derived from interest earned on these reserve assets, while USDC itself does not pay interest. Although Circle reported a modest accounting loss over the most recent twelve-month period, this was largely attributable to one-off equity compensation expenses associated with its NYSE listing. Adjusted for these effects, the underlying business appears profitable. Circle’s capital ratio remains modest but is reasonable given the low-risk nature of its assets and has improved relative to prior periods.
Principal Risk Drivers
The assessment finds that credit and market risks on reserve assets are not the primary sources of default risk for USDC holders. Exposure to US Treasuries and short-dated repos carries minimal default risk, and asset duration is short. Liquidity risk is also limited, as Circle undertakes to meet redemption requests within three business days.
Instead, the dominant contributors to default risk arise from operational, legal, or criminal events at the issuer level. These include fraud, cyber incidents, processing failures, litigation, or regulatory penalties. While such events are typically low in severity, there exists a small probability of an extreme, high-severity incident that could exceed Circle’s capital and operating buffers. This tail risk accounts for the majority of the estimated probability of default.
Loss Severity and Holder Outcomes
Loss severity for USDC holders depends on the legal treatment of reserve assets in an issuer insolvency. If reserves are fully bankruptcy remote, losses would likely be limited to delays in access to funds. If reserves were partially included in Circle’s estate, recoveries would still be expected to be high given the liquidity and quality of underlying assets. The assumed 20% LGD reflects a conservative midpoint across these outcomes.
Conclusion
This assessment illustrates how the credit risk of a stablecoin can be analysed by focusing on the issuer’s ability to honour redemption obligations, rather than on the token in isolation. As stablecoins increasingly intersect with payments, trading, and regulated financial activity, the need for objective, forward-looking issuer credit analysis continues to grow. Circle’s role as issuer of USDC provides a clear example of how such analysis can be applied using modern credit risk techniques.
