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USDC - another stablecoin may fail?

USDC - another stablecoin may fail?

created Michał Sielski14 March 2023

The liquidation of Silvergate Bank and the expected domino effect on the market puts another stablecoin at risk. Will the USDC lose its peg to the US dollar for good and disappear from the market? Let's check the facts.

The cryptocurrency market was shaken last week by the information about the liquidation of Silvergate Bank. However, the bank's troubles had already begun. That's why Circle - the stablecoin issuer USDC – gradually transferred its reserves from this bank as early as April 2021. The cooperation was to end definitively just before its liquidation.

Where did Circle have USD reserves?

Stablecoin issuers must undergo audits, and although there are objections to them, such documents are usually published. Circle was no different. We could see the results of the last audit in January 2023. It shows that reserves in US dollars are held in many banks. In addition to Silvergate Bank, where reserves were held until February, there are also Citizens Trust Bank, Signature Bank, Bank of New York Mellon, Customers Bank, New York Community Bank, Flagstar Bank and Silicon Valley Bank.

Silicon Valley Bank Closed, USDC Uncovered?

However, Silicon Valley Bank was abruptly closed in March by the regulator. Reason: insolvency of the institution. USDC, meanwhile, was backed by $3,3 billion in reserves at that bank. Circle already acknowledged this in an official communiqué.

It is worth remembering that the entire USDC reserves are estimated at approximately USD 40 billion. 75% is secured by short-term US government bonds and 25% is cash held in the aforementioned banks.

Now Silicon Valley Bank is closed, but does that mean that the USDC cover that was held there is irretrievably lost? Not necessarily. Some experts believe that the bank has coverage of about 80 cents for every dollar deposited.

How much will he lose on the USDC exchange rate?

Therefore, two extreme scenarios should be analyzed. The most negative assumes that Circle will not recover anything from the funds entrusted to the bank. It is easy to calculate that in this case it will lose 8% of its coverage. In this case, should the stablecoin rate also be valued 8% lower, i.e. at USD 0,92?

On March 11, 2023, the rate even reached USD 0,90, losing parity with the dollar with great impetus. Investors reacted - as always in such situations - with great determination.

However, if USD 0,8 for every dollar could be recovered - according to experts - the loss will be only 2%, which means that the exchange rate should eventually fall to USD 0,98.

After the weekend, March 13, 2023, the USDC exchange rate behaved like this. Stablecoin it is currently valued at $0,989.

What's next for the USDC stablecoin?

It seems that the loss will not be as big as initially thought by investors. After all, Circle has its own funds from which it can cover at least part of the hole caused by the bank's bankruptcy. What's more, there are many institutions that, with such capitalization, will gladly lend them money to maintain liquidity.

However, the situation is still dynamic. Already on Friday, March 10, 2023, the trading of Signature Bank shares, where part of Circle reserves rests, was suspended. More inquisitive investors also point out that the CEO of Signature Bank resigned after 20 years in this position. Kraken also withdrew its funds from the bank.

So what happens when Circle goes bankrupt? In theory, USDC holders should get 75% of the value deposited in bonds USA. However, it is not known how another stablecoin bankruptcy will affect the broad cryptocurrency market. That is, it is known that it is negative, but it is impossible to assess how long and deep the declines will be.

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About the Author
Michał Sielski
Professional journalist for over 20 years. He worked, among others, in Gazeta Wyborcza, recently associated with the largest regional portal - He has been present on the financial market for 18 years, he started on the Warsaw Stock Exchange when the shares of PKN Orlen and TP SA were just being introduced to the market. Recently, his investment focus has been exclusively on the Forex market. Privately, he is a parachutist, a lover of Polish mountains and a Polish karate champion.

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