Although $USDC has since regained its peg to the US dollar, there are justifiable fears that it might end up like collapsed UST especially since the full effect of its exposure to SVB has not been revealed. However, amidst this fear, $USDC would not likely crash to zero like $UST, the algorithmic stablecoin by Terra, did last year.
Recall that the collapse of $UST was attributed to its structure and backing by other digital assets, including Bitcoin and $LUNA. Since it depended on algorithms to track the value of the USD and always ensure parity, any pressure on its underlying coins (Bitcoin or LUNA), led to intense selling pressure, which caused a de-peg.
While USDC’s depeg is unideal in the short-term, 91.75% of Circle’s USDC reserves remain liquid, even if the 8.25% of funds are totally lost, Coinbase would probably step in. It’s not like the FTX situation. Circle has 91.75% of the money. FTX had way less.
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Circle is a regularly audited US entity and USDC has maintained a solid peg since its inception, unlike many other troubled stablecoins. Circle tweeted that “Circle and USDC continue to operate normally”
Now, USDC, issued by Circle, is backed 1:1 with cash, and redemption means every backing cash or cash equivalent from Circle must be sold and disbursed to the client. Reports showed that out of the entire basket of assets backing $USDC circulating supply, only $3.3 billion are stuck in SVB, less than 9% of its market cap’s USD equivalent. And even the funds are expected to be recovered sooner or later through bank insurance procedures instituted by FDIC.
The Federal Deposit Insurance Corp [FDIC] announced that all depositors, both insured and uninsured, at Silicon Valley Bank [SVB] and Signature Bank, will be made whole while equity and bond holders are wiped out. Why, I wonder, will equity and bond investors remain loyal to regional banks? This is how the Fed intends to backstop other liquidity issues through a new facility called the Bank Funding Term Program.
The idea is to provide banks with an alternative to liquidate their bond holdings when in need of raising liquidity to meet deposit outflow.
As a result, the damage done by its exposure to SVB might have been exaggerated. That’s why it is overdramatic to compare the $USDC troubles to those that led to the collapse of the Terra ecosystem almost a year ago.
The tremors caused by Circle’s exposure to SVB have reverberated through the crypto sphere, and as the dust continues to settle, questions are still hanging, not only on $USDC but overall stablecoins and their ability to maintain their pegs in times of distress.
Panic over SVB is over. Now, the onus lies on the crypto industry to regain public trust regarding stablecoins which is one of the bedrock of mainstream adoption, by putting in place measures to prevent future systemic failures.
I would especially keep an eye on zkEVM for Polygon, Bedrock for Optimism, Solana Migration for HNT, RDNT V2 and CAKE V3.
Stablecoins for Curve and Aave could fit in a narrative, especially with what happened to USDC. Of course now that USDC is close to peg, it’s easy to say it was a safe bet to buy USDC. Still USDC is not on the same level of risk UST was.
Always remember when something happens, crypto twitter’s reaction is 10x worse. Rationality leaves the door quickly in a state of panic. Seen people compare $USDC to $UST. UST was backed be magic internet money (algorithmic). USDC is backed by real reserves.