Until a week ago, USD Coin was seen as the world’s safest stablecoin.
BUSD, one of its chief rivals, was shut down last month by US regulators. Tether, the only stablecoin currently ahead of USD Coin, has long been plagued by questions over its reserves (I interviewed Tether’s Paolo Ardoino on this and other stablecoin issues a few weeks ago).
But a week is a long time in crypto, and things have certainly changed. The collapse of Silicon Valley Bank (SVB) sent shockwaves through the market, with the issuer of USD Coin, Circle, holding reserves backing up USDC in the bank.
What happened USDC?
Originally, the market didn’t know how much of Circle’s reserves were in SVB. It was known that 25% of Circle’s reserves were held in cash at banks, but the breakdown was not clear. It was then confirmed by Circle that 8.25% were held at SVB, amounting to $3.3 billion.
The sell-off during this period of doubt – and thereafter – was aggressive, USD Coin de-pegging to below 90 cents on several exchanges and pulling Bitcoin down with it.
USDC supply sells off despite bank guarantee
The US administration stepped in to guarantee deposits, however, and thus the peg of USDC quickly restored to near $1.
But the overall supply of USD Coin has fallen significantly. In just over a week, the supply has dropped 17%, from $44.2 billion on March 6th to $36.9 billion today.
It will be interesting to track if investors allocate back in, but following a year which has seen so many crypto scandals – including some not-so-stable stablecoins – the anxiety surrounding the banking wobble is understandable.
Circle’s supply was dropping even before the SVB debacle, in line with the continued rout of the entire cryptocurrency industry during this bear market. Last July marked the peak of $58.3 billion. It has fallen 37% since, a decline of $21.4 billion.
What next for USDC?
Of course, looking back over a longer timeframe shows how remarkable the growth has been, with USDC one of the big winners of the relentless bull market of 2020 and 2021.
What is next for USDC is less clear. The confidence in cryptocurrency as a whole is still in the gutter, despite the recent resurgence of Bitcoin. This has been the biggest factor out of all in its slide over the last year.
Regulators have also been moving into the space at an increasing pace. Some suspect this may help Tether, who already holds the number one spot and have the advantage of being headquartered outside of the US.
But despite the mayhem of the past week, USD Coin’s big advantage is its transparency and reserve situation. Only 25% of its reserves are in cash, with the bulk of the remainder in T-bills. This represents about as safe as an investment as possible (if T-bills were to fail, there would be no dollar and hence no stablecoin in any case!).
As I said, just last week this was seen as the safest stablecoin around. I’m not sure much has changed – this chaos stemmed from the traditional finance markets and a total mismanagement of risk from within banking. Circle will see this and allocate more prudently going forward – and the US stepped in in any case.
To knock USD Coin down from its perch in favour of another stablecoin would be a mistake. Out of the frying pan and into the fire, as the old saying goes.
The market may realise that going forward. Of course, who knows what will happen in the chaotic world of cryptocurrency – one brush of a pen from a regulator and that supply could plunge even more drastically.