The following is a guest post by Anndy Lian.
The crypto industry is currently experiencing anxiety due to concerns about the potential detachment from USDC, a US dollar-backed stablecoin. As someone who watches the market closely, I have watched the situation and would like to share some of my personal opinions.
First, it should be pointed out that Silicon Valley Bank (SVB), responsible for holding the funds supporting the USDC, would have enough assets to meet all withdrawal requests. According to Federal Deposit Insurance Corporation (FDIC) reports as of December 31, 2022, SVB had approximately $209.0 billion in assets and approximately $175.4 billion in deposits. However, despite the impressive asset base, concerns remain about the liquidity of SVB’s portfolio and the percentage discount that would be expected if the bank were to suffer significant losses.
This uncertainty stems from the fact that the bank’s underlying assets are not transparent and there is no clear indication of the degree of illiquidity or riskiness of these assets. Accordingly, there is a risk that if SVB’s assets suffer significant losses or become illiquid, the bank may find it difficult to meet all of its obligations, which could cause the USDC to decline. This would have a significant impact on the broader crypto market, as USDC is widely used as a trading pair on various exchanges.
Second, 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 Treasury bills, managed by Blackrock and held at BNY Mellon. This reserve allocation provides important security for the USDC, as treasury bills are generally considered very safe and highly liquid investments.
Treasuries held by Circle provide an absolute floor for USDC of around 0.77, which means that even in the worst case, USDC should not fall below this level. Additionally, since treasury bills are highly liquid, they should be easily sold if Circle needs to raise cash quickly to meet unexpected obligations.
This provides additional protection for USDC and helps mitigate potential risks associated with the stablecoin. It should also be noted that Circle’s retained earnings and interest income should theoretically be sufficient to cover any expected “losses” it may be exposed to from SVB. This means that even if SVB were to suffer significant losses or become illiquid, Circle should be able to cover all potential losses without affecting the stability of USDC.
Third, another point to consider when assessing the potential impact of a USDC withdrawal is Circle’s maximum exposure. This company issues the stablecoin to Silicon Valley Bank (SVB), which holds the funds supporting the USDC. Experts estimate that 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 sum, 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 crypto market as a whole has grown significantly over the past few years, with a current market capitalization of over $1 trillion. In this context, the 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.
Fourth, the relationship between Coinbase and Circle. Another factor that may reassure USDC investors is the relationship between Coinbase and Circle. Coinbase, one of the largest crypto exchanges in the world, 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 large investment in USDC and its partnership with Circle, Coinbase has a vested interest in ensuring the stability of the stablecoin.
This may mean that Coinbase could provide additional support to Circle if needed, further bolstering the stability of USDC. Coinbase has a solid reputation in the crypto industry and has demonstrated its commitment to regulatory compliance and financial stability. As such, Coinbase’s involvement in the management of USDC can provide an additional layer of confidence for investors.
While there are concerns about the USDC’s depeg potential, several possible scenarios could play out over the next week. One possibility is that Coinbase, as a Center Consortium partner and major investor in USDC, could provide additional support to Circle if needed. This could come in the form of additional financial support or other resources to help ensure USDC’s stability. Another possibility is that Circle may take out debt 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 USDC stability. It is also possible that the Federal Reserve will step in to support Silicon Valley Bank (SVB), the bank that holds the funds supporting the USDC. While this could be considered an unlikely scenario, it cannot be completely ruled out, given the potential impact of a USDC destabilization on the wider financial system.
Several steps can be taken regarding risk management for investors who hold 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 the value of USDC were to decline. Another strategy is to borrow USDC against USDT on loan protocols. However, this option may be limited due to the potential risks associated with USDC. Investors can also consider trading out of USDC and into USDT on CeFi exchanges at a rate of around 0.95 if they are concerned about the stability of USDC.
This can help reduce exposure to any potential risk associated with USDC. It is also important to note that investors should avoid sending USDC to Circle for redemption. Although the risk of secure redemption is relatively low, there is always a potential risk of this happening. As such, investors are recommended to hold USDC in a safe and secure portfolio and take appropriate risk management measures to protect their investment.
In conclusion, investors should remain vigilant and informed during market volatility, such as the current malaise in the crypto sector around USDC. It is important not to make impulsive decisions based on uncertainty or unpredictability, but to remain calm and clear-headed. 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 potential risks or vulnerabilities. Taking a measured and calculated approach to investing can help mitigate potential losses and protect assets. By remaining alert and well-informed, investors can navigate market volatility and uncertainty with greater confidence and clarity.