Circle Explores Reversible Transactions to Attract Banks, Institutional Clients

Circle, the second-largest issuer of stablecoins, is exploring the introduction of a "reversible" mechanism for its token transactions. This move aims to incorporate traditional financial controls and error correction functions, thereby attracting banks and institutional clients who prioritize security and compliance. Circle plans to implement this mechanism through its new blockchain, Arc, by adding a protocol layer that allows for "reverse payments" similar to credit card refunds, balancing the finality of transactions with the need for error correction.

This initiative marks a significant shift in the cryptocurrency industry, which has long sought to differentiate itself from traditional finance. The immutability of transactions has been a core advantage of blockchain technology. However, Circle's exploration into reversible transactions has been met with criticism from some cryptocurrency purists, who view it as a departure from the principles of blockchain technology. Despite this, the move could attract traditional financial institutions by lowering the barriers to entry for institutional investors.

Circle's new blockchain, Arc, is designed for financial institutions and aims to enable companies, banks, and asset management firms to use stablecoins for foreign exchange transactions and other payment activities. However, Arc has faced criticism for being too centralized, which goes against the original intent of blockchain technology to bypass intermediaries like banks. Circle has clarified that the reversible mechanism does not directly cancel or reverse transactions on the blockchain but rather allows for a "reverse payment" through a protocol layer, similar to a credit card refund process.

Circle's strategy focuses on attracting banks and large institutional investors, contrasting with the approach of the largest stablecoin issuer, Tether. Tether has established its market dominance by focusing on high-frequency cryptocurrency trading and providing dollar alternatives in emerging markets. To cater to institutional clients' strict requirements for financial information confidentiality, Circle is also researching options for users to choose transaction transparency. On the Arc chain, while customers' anonymous wallet addresses remain visible, the amount transferred will be encrypted.

Circle's transformation comes at a favorable macroeconomic backdrop. The United States is gradually establishing a regulatory framework for the stablecoin industry, with Congress passing a landmark bill in July to regulate the sector. Additionally, the Trump administration is reported to strongly support the development of stablecoins, aiming to expand the influence of the dollar into new markets. Financial service companies are viewing stablecoin technology as a potential means to achieve faster and lower-cost cross-border payments. The total value of stablecoins in circulation is approximately 2800 billion dollars. Circle's USDC market value is expected to grow by 770 billion dollars by 2027, according to a report by a major financial institution.