Overnight, Circle’s stablecoin USDC lost its peg to the dollar. Is this temporary or permanent? We take a look at the reasons for this panic.
USDC loses its peg to the dollar
Overnight, the second-largest stablecoin in the cryptocurrency ecosystem, the USDC, lost its peg to the dollar. Indeed, depending on the data sources, it is moving at the time of writing at $0.90 on CoinGecko, 0.897 on CoinMarketCap or 0.93 on the TradingView index. Its price currently remains very volatile:
USDC price on TradingView index
This event is not without bad memories, reminiscent of the early days of the fall of the UST. Before continuing, let us remind our readers that it is up to each of us to act according to our own convictions, and that it is not our place to advise fleeing the USDC or, on the contrary, to take advantage of a possible arbitrage.
To explain this panic, we must first turn to a broader phenomenon, which is the banking panic in the United States. We saw this with Silvergate Bank, which was one of the depositories of the USDC, and which this week announced its intention to liquidate it.
Fortunately, Circle, the issuer of the USDC, had already taken action by withdrawing its share of the reserves at Silvergate last week.
But yesterday, another bank failed: Silicon Valley Bank (SVB). SVB was administratively closed directly by the California branch of the Federal Deposit Insurance Corporation (FDIC). Circle holds about 25% of its cash reserves at various banks, including $3.3 billion at SVB, and the confirmation of this has caused the market to panic:
Silicon Valley Bank is one of six banking partners Circle uses for managing the ~25% portion of USDC reserves held in cash. While we await clarity on how the FDIC receivership of SVB will impact its depositors, Circle & USDC continue to operate normally.https://t.co/NU82jnajjY
– Circle (@circle) March 10, 2023
What happens now?
Factually, it’s impossible to say at this point whether the USDC will be able to move past this panic and get back to its footing. What is certain is that Circle has attempted to take action by withdrawing its cash from SVB, but confirmed early this morning that the $3.3 billion was still tied up in that player:
2/ Like other customers and depositors who relied on SVB for banking services, Circle joins calls for continuity of this important bank in the U.S. economy and will follow guidance provided by state and Federal regulators.
– Circle (@circle) March 11, 2023
Nevertheless, it would seem that these funds are safe. And for good reason, it was precisely to ensure the integrity of SVB’s customer deposits that the FDIC proceeded to close it. As of December 31, Silicon Valley Bank had $175.4 billion in deposits from all of its customers. Insured players should have access to their funds on Monday:
” All insured depositors will have full access to their insured deposits by Monday morning, March 13, 2023. The FDIC will pay uninsured depositors an early dividend within the next week. Uninsured depositors will receive a certificate of escrow for the remaining amount of their uninsured funds. “
As for Circle, it now has to rely on five other players to manage its deposits, including Bank of New York Mellon (BNY Mellon). This diversification was precisely to prevent such risks.
Regarding stablecoins, if algorithmic models have shown their flaws in the last year, centralised models also prove that they are not infallible, and that they are exposed to the risks of default of other centralised intermediaries, like the whole banking industry.
