Why the USDC dpeg is not a reason to panic

The following is a guest post by Andy Lian.

The crypto industry is currently experiencing anxiety due to concerns about a possible halving of USDC, a stablecoin backed by USDC. As someone who follows the market closely, I am following the situation and would like to share some of my personal views.

First, it should be emphasized that Silicon Valley Bank (SVB), which is responsible for holding the funds backing USDC, reportedly has enough assets to handle all withdrawal requests. As of December 31, 2022, SVB had assets of about $209.0 billion and deposits of about $175.4 billion, according to a report from the Federal Deposit Insurance Corporation (FDIC) as of December 31, 2022. However, despite the impressive asset base, there are still concerns about the liquidity of SVB’s book and what percentage cut would be expected if the bank experienced significant losses.

This uncertainty stems from the fact that the underlying assets of a bank are not transparent, and there are no clear indications of how illiquid or risky these assets may be. As a result, there is a risk that if SVB’s assets suffer significant losses or become illiquid, the bank may struggle to meet all of its obligations, potentially resulting in a devaluation of the USDC. This will significantly impact the wider crypto market, as USDC is widely used as a trading pair on various exchanges.

Secondly, another important aspect to consider regarding the stability of USDC is the financial backing provided by Circle, the company that issues the stablecoin. Circle holds 77% of its reserves in highly liquid instruments such as 1-4 month T-bills, managed by BlackRock and held at BNY Mellon. This allocation of reserves provides significant protection for USDC, as T-bills are generally considered very safe and highly liquid investments.

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The T-Bills held by Circle provide an absolute floor for USDC of around 0.77, meaning that even in a worst-case scenario, USDC should not fall below this level. In addition, since T-bills are highly liquid, they should be easily sold if Circle needs to raise funds quickly to meet unexpected obligations.

This provides additional security for USDC and helps mitigate any potential risks associated with the stablecoin. It’s also worth noting that Circle’s retained earnings and interest income should theoretically be enough to cover any expected “losses” that may emerge from SVB. This means that even if SVBs suffer significant losses or become illiquid, Circle should be able to cover any potential losses without affecting the stability of USDC.

Third, another point to consider when assessing the potential impact of the USDC depeg is Circle’s maximum risk. The company issues the stablecoin to Silicon Valley Bank (SVB), which has funds backing USDC. Experts estimate Circle’s maximum exposure to SVB will be around $198 million, a relatively small percentage of the total funds backing USDC, which is around $3.3 billion.

While this may seem like a large amount, it is important to note that Circle has significant financial reserves and should be able to absorb any potential losses without significantly affecting the stability of USDC. The overall crypto market has grown significantly over the past few years with a current market capitalization of over $1 trillion. To put this in context, a potential loss of $198 million would represent a relatively small percentage of the overall market. This should not have a significant impact on investor confidence or the stability of the crypto market as a whole.

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Fourth, the relationship between Coinbase and Circle. Another factor reassuring investors in USDC is the relationship between Coinbase and Circle. Coinbase, one of the world’s largest crypto exchanges, has $4.4 billion on its balance sheet and is a 50-50 partner with Circle in the Center consortium, which oversees the technical aspects of USDC. Given its significant investment in USDC and its partnership with Circle, Coinbase has a vested interest in ensuring the stability of the stablecoin.

This could mean that Coinbase could provide additional support to Circle if needed, further strengthening the stability of USDC. Coinbase has a strong reputation in the crypto industry and has demonstrated a commitment to regulatory compliance and financial stability. Therefore, Coinbase’s involvement in managing USDC could provide an additional layer of confidence for investors.

While there are concerns about a possible USDC depeg, there are several possible scenarios that could emerge next week. One possibility is that Coinbase, as a participant in the Center consortium and a major investor in USDC, could provide additional support to Circle if needed. This could take the form of additional financial backing or other resources to help ensure the stability of USDC. Another possibility is that Circle could take out loans or credit facilities from BlackRock or other institutional lenders to help shore up its financial position.

This could provide additional liquidity and help address any concerns about the stability of USDC. It is also possible that the Federal Reserve could intervene to support Silicon Valley Bank (SVB), the bank that backs USDC. While this can be seen as an unlikely scenario, it cannot be completely ruled out given the potential impact of USDC volatility on the wider financial system.

There are several actions that can be taken with respect to risk management for investors holding USDC. One option is to hedge USDC/USDT perpetual swaps by shorting USDC through centralized or decentralized exchanges (CEFI or DEX). This strategy can help offset potential losses if USDC declines in value. Another strategy is to borrow USDC against USDT on the Lending Protocol. However, this option may be limited due to the potential risks associated with USDC. If investors are concerned about the stability of USDC, they can consider trading USDC out of USDT and into USDT on CeFi exchanges at rates around 0.95.

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This can help reduce the risk of any potential risks associated with USDC. It is also important to note that investors should avoid sending USDC in circles for redemption. While the risk of gated redemption is relatively low, there is still a potential risk of this happening. Therefore, it is recommended that investors keep USDC in a secure wallet and take appropriate risk management measures to protect their investment.

Lastly, investors should remain vigilant and informed during market volatility, such as the current unease in the crypto sector surrounding USDC. It is important not to make impulsive decisions based on uncertainty or unpredictability, but to remain calm and clear-minded. One way to stay informed is to follow updates and analysis from trusted sources such as financial news outlets or industry experts.

It is also important to understand one’s investment portfolio, including any potential risks or vulnerabilities. Taking a measured and calculated approach to investing can help minimize potential losses and protect one’s wealth. By staying observant and well-informed, investors can navigate market volatility and uncertainty with greater confidence and clarity.

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