Circle's Dirty Secret: Your Stablecoin Is Backed by a Bond Even the Fed Abandoned

Zed Nation readers, grab a cold Mosi and sit down, because what I found in the guts of Circle's stablecoin reserve will make your blood boil. While the world is busy worshipping at the altar of digital money, the people holding the bag are sitting on a bond that the US Federal Reserve itself walked away from years ago. And the numbers are so wild, they sound like a barroom bet gone wrong.

What is Circle's USDC reserve actually holding?

Circle runs USDC, the second-biggest stablecoin on the planet. Its reserve is a money market fund managed by BlackRock, the global finance giant. Every month, that fund files a public form called N-MFP3, listing every single counterparty and every single bond posted against every trade. It's all there in black and white, but nobody reads it. I did, and I'm questioning my life choices.

Here's the kicker: the Fed holds $184.3 million of a certain 20-year Treasury bond. Circle's reserve holds $3,967.2 million of the same bond. That's 21 times more. A crypto ticker owns more of this bond than the central bank of the United States. Tell me that makes sense.

Why did the Fed abandon the 20-year Treasury bond?

This 20-year bond came back in May 2020 after decades of absence. The Fed was in the middle of its quantitative easing (QE) program, so it gobbled up a third of every issue. In June 2020, it took 33.2%. In August, 35.6%. In November, 36%. A third of the whole thing, every single time.

Then QE ended in March 2022. The August 2021 issue saw the Fed take just 10.5%. By August 2022, it was 4.8%. By November 2023, it was 0.44%. Zero point four four percent. The auction size also got slashed from $85.6 billion to $40.9 billion. They built a bond for a buyer that walked out of the room.

How much of Circle's collateral is in this unwanted bond?

Here's where it gets truly absurd. Out of the 25 20-year bonds in existence, 23 of them are sitting in USDC's collateral book. That's 45.08% of its bond collateral. This one unloved, abandoned bond makes up nearly half of the stablecoin's backing. It's 24.39% of the actual bond market for that tenor.

Why does this matter for Circle's business model?

Because 95.2% of Circle's revenue comes from interest on this collateral. Last quarter, the reserve brought in $667.7 million out of $701.3 million in total revenue. That's the whole company, right there.

But here's the part that should scare every USDC holder: $410.4 million goes straight out the door in distribution costs, and another $254.4 million goes into operating expenses. The operating income left over? A measly $34.4 million. They keep 5 cents of every dollar the reserve earns, and the markets are modelling this thing like a growth stock.

Is USDC actually growing or shrinking?

The 10-Q opens with a headline: USDC in circulation grew 19% to $73.3 billion. Sounds great, right? But look at the monthly data: $77.36 billion on 30 April, $73.78 billion on 30 June, $72.06 billion on 31 July, $71.99 billion on 17 August. Four months straight in the red.

Both numbers are honest, but only one is useful. That 6.9% decline is roughly $46 million a quarter in lost reserve income. The operating profit is $34.4 million. The decline that already happened is bigger than the entire profit. Let that sink in.

What changed in Circle's reserve strategy?

A year ago, on 31 July 2025, Treasury bills were 34.21% of the fund, repo was 64.32%, and the weighted average maturity was 15 days. Now it's 11.82% bills, 86.84% repo, and 7 days. They sold the bills and pushed everything into overnight repo.

The blended yield is around 4.24%. The repo book does 3.64%. That gap is $94 million a quarter, which is 2.7 times the operating income. They're earning general collateral, maybe 2 to 4 basis points over what literally anyone gets for showing up.

Why did $33 billion leave central clearing in one month?

On 30 June, 81.07% of the repo book was centrally cleared. On 31 July, it was 17.73%. That's $33 billion out of central clearing in four weeks. I went back a full year to check if this was normal. It never once dipped below 48% in 12 months. Then suddenly, 17.73%.

June's high is just a quarter-end thing, dealers netting into FICC for the balance sheet. Boring. But April and May are also quarter-ends, and they're both above 60%. So no, July is just July. Same month the collateral goes long: 26.70% beyond 10 years, up to 40.28%.

The haircut stayed the same, 102%, for every single counterpart, both months. Barclays hands over 88% long paper and pays 2 cents. JP Morgan hands over nothing past ten years and pays 2 cents. Nobody is pricing anything.

Is Circle breaking any rules?

I spent about an hour building a legal case before I actually read the statute. I was wrong. The GENIUS Act, which governs this, has no maturity cap on collateral for reverse repos where the issuer is the purchaser. The 93-day limit everyone quotes is for outright holdings and repo in the other direction.

The conditions are: tri-party, or centrally cleared, or bilateral with a creditworthy counterpart. Three options, treated as the same thing. Circle is all tri-party, so it passes either way.

How is this legal if it looks so risky?

This is the part that really gets me. The liquidity rule says daily liquid assets must be 100%. An overnight repo comes back tomorrow, and the fund is 86.83% overnight repo, so mathematically it's perfectly liquid. The GENIUS Act says fully qualifying. The fund's own margin policy says 102%, completely unchanged.

Cleared went from 81% to 17%. Collateral went from 26.7% to 40.3%. None of them moved. Not one basis point. And none of them is broken either. A clearinghouse takes the other side and owes you cash. A tri-party custodian holds bonds and hands you the bonds. Congress wrote those as equivalents. The liquidity rule looks at when your claim matures and never asks what is behind it.

So the three rulebooks are all working exactly as designed, and the whole thing lives in the tiny gaps between them.

What happens next for Circle and USDC?

There are three ways this goes. Margin just keeps compressing, which needs nothing to break and is probably what happens. Or flows stabilise, rates hold, and they grow into the cost base, which depends on things Circle doesn't control. Or something actually goes wrong in the collateral, which is unlikely and nobody is underwriting because every metric says fine.

My calls are going to be dated, so hold me to them:

• Q3 reserve income prints below $667.7 million sequentially, late October or early November.
• The N-MFP3 filed in early September for 31 August shows cleared repo below 40%. If it's above 60, then July was noise and I read too much into one month.
• The 20-year stays above 35% of bond collateral in that filing. It's 45.08% now.
• USDC supply falls below $71.99 billion by 31 December.

Circle's stock is at $74.59, down 53.2% from its high of $159.47. I'm not telling you what the stock does. I'm telling you it's a spread business earning general collateral, keeping a nickel, secured by the bond the Fed walked away from in 2022, where it holds 21 times what the central bank does, and every framework built to catch this says one hundred per cent.

For Zambia, the lesson is clear. When the global financial system builds its digital money on bonds nobody else wants, the whole house of cards can come tumbling down. We've seen what foreign financial engineering does to nations that trust it blindly. Our copper, our land, our resources, those are real. This is paper promises stacked on top of more paper promises.

Zed Nation, keep your eyes open. The empire is printing digital dollars backed by bonds even they don't believe in. And when it collapses, they'll come looking for someone else to pay the price. Don't let it be us.