USDC is managed the Centre consortium, which was founded by Circle and includes Coinbase as a member.
Circle held around $3.3 billion in Silicon Valley Bank, leading to a run on USDC which resulted in it trading for as little as $0.95 on some exchanges today (Mar 10, 2023). This represents around 30% of USDC's cash reserves and 7% of its total reserves. The balance of reserves are held in T-Bills, which are liquid and typically can only be traded during market hours. Coinbase itself has around $2B of USDC on hand. Circle's rumored exposure to Silvergate's collapse is also a concern.
If more than $7.8B of USDC were to be liquidated over the weekend, USDC would be effectively insolvent. Freezing trades until the market reopens limits this. USDC should rapidly stabilize due to being backed by very liquid hard assets, but it will probably lose significant marketshare to Tether.
There's something deeply ironic about a flight to safety in the form of Tether, which has famously been described as being "quilted out of red flags".
But if you can't redeem it and it's not backed by anything remotely approaching normal assets, I guess you can't have a bank run on it either... until the music stops and the insiders propping it up run out of chairs.
There's something to be said for everyone knowing the risks of doing business with you, and behaving consistently (consistently badly) so that those risks don't change. That's the regime of Tether. Nobody will even be mad when the rug gets pulled.
The federal reserve could stand to learn a thing or two, honestly.
The structure of risk is similar for both Tether and Circle, AFAICT.
While USD risk is heavily distributed across many regulated banks and there are measures in place to mitigate bankruptcy, USDC/T is fairly centralized and the fall of a single bank can put the entire currency at risk, cause sudden and extreme inflation (as is the case now), and potentially stop being accepted by even more merchants.
USD risk exists, but seems lower than USDC/T risk, and the same is true for its volatility. All in all, I am not surprised that there are more merchants that accept USD than USDC/T, and the change in methodology that would make the latter competitive would likely require taking a page from the Federal Reserve, not vice-versa.
Perhaps they could learn that doing consecutive 50-75 bps rate hikes for an entire year will bring with it a lot of adverse effects in a world where they are expected to hike 25 bps at a time?
Nobody pricing interest rate risk would have priced what happened last year correctly - it would have been considered a one-in-a-million event, not a routine response to high inflation.
I think what really drove actors like SVB to indulge in speculative yield-chasing was central banks driving rates to zero, saying they'd be near zero for a long time, and as inflation ticked up that they weren't even "thinking about thinking about raising interest rates", and then continuing to hold them at zero while calling inflation transitory as it reached multidecadal highs.
This trained everyone to speculate that the Fed was ignoring inflation on purpose and they should allocate accordingly.
So many people unbuckled their seatbelts as the driver sped through several red lights while saying he wasn't even planning to touch the brakes. When he did eventually slam the brakes a moment later, the passengers flew through the windshield. The driver deserves blame, but blame him for speeding, not for slowing down -- the latter is the only responsible thing he did.
This is just not true. I saw many people predicting that after leaving interest rates low for so long and breezily treating inflation as transitory, that the Fed would have to frantically overcorrect with rapid hikes to keep their credibility. And if I saw that multiple times in public places, big institutions with experienced people probably knew it even better, which is probably why SVB is hosed while CDSs at JPMorgan/GS/etc. have barely budged- they knew what they were doing.
SVB bought those assets 2 years ago, prior to the yield curve inversion or any of the current macro conditions. Also, the last rate hike was 25 bps, and early in 2022 people were expecting a slowdown to 0-point hikes by now. Prognosticating about this stuff to price long-term fixed-income vehicles is tricky.
India is a developing country. Are you somehow under the impression that the US army will attack a coffee shop in New Delhi if they stop taking US dollars?
Even in those parts of Mexico and Caribbean countries where the economy is heavily dependent on US tourism - and the US dollar will be accepted at retail shops; the price difference between paying in dollars and paying in local currency is going to be against the US dollar, and for any significant transaction, you will be better off paying in the local currency.
More to the point, it is true that a considerable part of international trade is conducted in USD. It is also true that the USA tries very hard to keep it like that (more so through economic sanctions than the military might), but it's hyperbole to state that any country that does not accept USD will get attacked.
For example, India and China buy a non-trivial part of their oil in roubles and have not been attacked - so far.
no but expect the US to start invading weaker countries that depeg from the dollar. the US is, at present, the world's reserve currency. that status is what creates the petrodollar. as countries move towards Russia or China, that hegemony is threatened.
you're aware that barrels of oil are sold in USD and this status is what maintains the American position as the world's reserve currency, right? you're also aware of the wars, coups, and sanctions that have been used over the past 60 years to maintain that position? Venezuela and Iran are the only two countries to have left that standard and we've ratcheted up sanctions on both in response.
I wouldn't claim the US is some miracle of innocence.
You said "countries that depeg". Pegging, in the context of cryptocurrencies and regular ones, means something specific: ensuring that the exchange rate between the 2 is fixed within a certain band. I don't believe that the US is threatened by whether other countries peg their currency to the dollar or not.
The dollar's use as reserve currency is a separate matter.
Many "countries" don't do business in USD, they do business in their own currency. Why haven't those countries already been invaded if what you're saying is true?
Unlucky for the UK coffee shop that wouldn’t take my USD this morning I guess? Not quite sure what you’re trying to say, if a country doesn’t want to accept usd…they don’t have to
His point is that fiat currencies are issued by, and backed by, the state and the that trust is, ultimately, based on its enforcement capacity - the police/courts/US army rather than convertibility with gold or other hard asserts.
Except a $100 bill is likely accepted. I’ve been to developing countries that will accept local currency, dollars, and euros. I doubt they would accept any pounds, tethers, or other fake electronic currency.
You won't get anywhere with a $100 bill in many developed countries, outside of some very tourist-y areas maybe. At least not in regular shops, of course you can exchange it at a bank. But if you try to order a coffee with US dollars, you won't get one.
Nah. The "term" USD is common, but that's very different from presenting physical US currency to people and trying to get them to accept it.
At least in Australia, I'd be surprised if more than a single digit percentage of the population would be able to tell if the (US) currency someone presents is real vs pretend/monopoly money.
They'd most likely think the person is trying to scam them.
Handling a foreign currency is a lot of overhead, you will only find this accepted in locations where it is quite common for people to not have the local currency. If you're in the middle of Europe you'll have a hard time finding a place that will just accept US dollars outside of some very tourist focused destinations. And even there I'm not sure if it'll work.
The places where I've seen this mostly work was near borders, and it makes sense that you'd accept the neighbour currency there even if it is some overhead. If you can quickly hop over the border you're much less likely to exchange currency before than if you plan a full trip in a different country.
Pounds have reasonable acceptance in Africa, the Middle East and parts of Asia -- many of those countries either used to be part of the British Empire or a neighbour, so there's trade, emigration, etc. Probably the Caribbean too, though I haven't been there.
In most cases e.g. a French tourist would be fine taking euros, but a British tourist can take pounds and not pay to convert to dollars or euros first.
Really? Pls back this up with a citation or example. Name one country in those places or outside of Britain for that matter where british pounds are accepted as currency - today and not 1950
I wrote "reasonable acceptance". You can pay for a taxi, a good quality/touristy restaurant or a safari. You can easily exchange sterling for local currency at banks or currency exchange offices.
Entirely depends on country and business in the country.
I've seen Americans try to pay for taxi's in Thailand with USD, the drivers aren't interested, it's a hassle more than anything. In cambodia on the other hand, yes, they'll take it.
Depends entirely on how stable the local currency is, if it's reasonably stable and well managed then probably they won't be interested.
I am under the impression that pretty much anywhere in the developing world USD will spend. Maybe not in the west, but places that have a weak currency like africa, the middle east, and south america.
Nope I said developing world like Central and South America. Lots of tourists places will accept Euros and dollars as long as the bills are not damaged.
Mexico, Costa Rica, Panama, Nicaragua, Belize, and Colombia are places where I’ve done this personally and lots of Europeans were doing the same.
Friends and family in Costa Rica even advised that local currency wasn’t necessary and suggested bringing crisp bills from my bank.
At least in big cities in Argentina, you can pay with dollars in many places. Some shops like big supermarkets even have a sign that shows their exchange rate. (Note that the official exchange rate is AR$200, but the unofficial one is AR$400. You may get a bad exchange rate in some shops.) For buying clothes it may be more difficult because you must negotiate the exchange rate, and they may only accept only US$100 bills, and only if they look nice and is the new model that has a big face. It may be more difficult to pay the electricity bill in dollars.
(In small towns it may be more difficult, but not impossible, specially if you are nice.)
As a tourist maybe. But try to do it at any place mostly frequented locals in Europe and you will get nowhere. But funny thing. Same does not only apply to USD, but Euros as well. And EU doesn't even have army. And still on my last trip the taxis took the money.
I think the main disconnect is between developing countries (that may have currency stability issues and where folks are more likely to use dollars or euros) and the developed world, where there is no benefit in using USD for regular transactions. Plus a whiff of "F those Americans who act like they own the whole world".
And your specific comment that started this didn't read like you are only argued about developing world. My 2c.
This is a really bad misunderstanding of how governmental monopoly on violence affects the acceptance of its currency.
The USD has value because you need to pay your taxes in USD, and if you don't pay your taxes, the government will take away your freedom. It has nothing to do with people in other countries transacting in that country's local currency.
If it was about taxes people would just hold something else and converted some temporarily to pay their taxes leaving government with currency nobody wants.
It's all about people's trust and willingness to store savings and make loans in a given current.
> If it was about taxes people would just hold something else
Not following this at all. You having to pay tax in USD means you're going to prefer holding USD and being paid in USD as well. Anything else would be strictly inferior, as now you have to worry about doing conversions all the time.
Note that it's mandatory for taxes to be withheld with each paycheck, and those withheld taxes must be paid in, you guessed it, USD, so you must be paid in USD as well.
> You having to pay tax in USD means you're going to prefer holding USD and being paid in USD as well.
Huge part of the world have to pay taxes in their local currencies and yet prefers storing savings in USD.
> Anything else would be strictly inferior, as now you have to worry about doing conversions all the time.
You weight it against other pros and cons. Even US billionairs do not store their savings in USD cash, and don't seem to mind "conversions all the time".
Petrodollar is just a term. It does not mean that the contracts are in US Dollar. The measurement is in NOK.
"In Consideration of the assignment described under Article 2.1 above, Buyer shall pay to Seller a post tax amount of NOK [zz] ([zz]), ref. Article 5."
Isn't it the same for USDC? USDC is not a traditional cryptocurrency, its issued by a US organization, so I guess this organization would in the same way be protected by USA army, and indirectly USDC as well?
Lack of redeemability, lack of transparency, and a history of fraud.
Banks contractually guarantee the right to redeem deposits for cash. Redemption of tether for USD seems to be subject to the discretion of its operators.
Banks are fairly transparent about their assets to the public, and completely trasparent to their auditors and regulators. Tether is an unaudited, unregulated black box.
IMO, tether is no longer a fraud, but it definitely was for a while when they were claiming 100% cash reserves but actually running with fractional reserves. Banks don't lie about their reserves.
Tether has successfully maintained its peg for nearly 10 years now, despite being an enemy of the US government. That is actually an incredible achievement.
Tether is better run than any other stable coin. Yes, it could go to zero for many different reasons, but the main reason it gets so much flak (compared to other stables) is because it is less compliant with US regulators than USDC and the other major stable coins. Being less complaint with US regulators is also the reason it is used more than any other stable (highest volume by a wide margin); because people without US bank accounts can actually use it. Tether is a very helpful resource to a lot of people that otherwise would not have access to USD.
Agree that tether will inevitably go to zero, but I don't think it will be Bitfinix pulling out the rug. Tether is more useful for more people than any other stable for the time being. IMO it will be the last stable standing unless the US regulators go after them hard before going after others, which is very possible.
I mean if you set the bar beneath the floor, yeah, sure. but my bar is "not a scam" so hell no. why the hell would I touch tether or any other stable coin following six whole years of reporting on how much of a scam stable coins are? am I supposed to trust their reserve "audits", which amount to a "trust us bro" letter sent to the auditor? are you aware that these verifications of reserves were done by depositing the requisite amount of money into a bank account that was set up for the auditors to have access, with no indication of where the money came from or whether it even belongs to tether? are you aware of their incestuous relationship with bitfinex, a fact that should raise a hell of a lot of questions, especially after the collapse of Alameda and FTX?
you can't sell me USDC because I'm not buying. "X scam is more of a scam than Y scam" is not a sales pitch for Y. it's a statement that should lead you to reconsider why you have any money with any of these people. or, you know, you can be another notch on the belt of the grifters, scammers, and vultures that dominate crypto. I guess the second is a more exciting way to live.
Can't help but revel in the fact that these crypto ponzi schemes are so dependent on the very banks all the cryptobros denounce, as evil holdovers from the past that will be obsoleted by their scam tokens (that no one outside their bubble even knows how to use).
It's so ridiculous I just have to kind of admire it. It's like a cathedral of human hypocrisy.
Or maybe you just don't understand it? The whole point of USDC is to have exposure to USD and the US banking system, which is supposed to be stable compared to other banking systems around the world. Could that maybe be why it's called USDC? Hmm.
If the US banking system starts failing, it absolutely should affect USD stable coins backed by exactly this banking system.
The USD is entirely unaffected. Some deposits at certain banks are affected for large (mostly professional) holders. Retail investors will be made whole (up to 250k), thanks to this banking regulation thingy you might have heard of.
USDC is meant to mirror the USD (sure, with its concomitant FX and inflation risk), but it is certainly not meant to introduce credit risk vis-à-vis some bank most people hadn't heard of last week.
You’re aware that ~$150B of $200B SVB deposits are not covered by FDIC insurance, correct? I don’t think SVB is going to end up 0, but pointing at 25% of investments being safe and saying “look regulation works so well” seems absurd.
All the people involved are institutional investors. 0% of people who have USD savings under $250k are affected by this. On the other hand, anybody who has a significant portion of their net worth tied up in cryptocurrency is affected by this.
Indeed, if your company is in the banking business without understanding the banking business, you might have a surprise coming up. As in most other industries.
It‘s a bit like expecting physical USD bills to spontaneously combust due to whatever market forces.
The value of one USD stablecoin (measured e.g. in various commodities) might well go down, but the redeemability for one USD never should, regardless of the economic environment.
No, in many countries you cannot buy USD directly. You also cannot store USD in a local bank account. And in various places it's explicitly forbidden to hold USD as savings because it would devalue local currency if everyone started transacting in USD instead.
So, the "C" makes USD exposure available to anyone worldwide, assuming you have e.g. an Ethereum wallet.
I have family in third-world countries, and usually have them buy me flight tickets when I want to visit them. Cheapest way and easiest for them to withdraw, is me sending them USDC. Some of them use USDC directly to exchange with friends for goods and services, others manage to sell them P2P in their country for USD, which they can then trade for local currency.
Messy, inefficient and UX could be way better, but it works and is cheapest for everyone involved.
I have lived and travelled extensively in second and third world countries, and almost never had a problem buying or selling USD. Well, in some places there were indeed capital controls (Argentina, China), but that's rare, and I doubt use of USDC is legal then for the circumvention of regulation (which is basically the only use case of crypto).
If only you know the long queue you have to join now if you want to buy dollars from a Nigerian bank. Not just that you have to fill a form saying what the money is for which had better be one of the things in their list, you have to wait for months to get credited.
Many people visiting countries saying "I have been able to use USD wherever I go, I could even pay for dinners" miss the fact that it's often different for the people who live there, who are gonna have to integrate with the local legal/financial process in order to get their local currency. The tourist hardly have to care about it, and then they tell the internet that there is no problems.
The big one is that many countries do offer foreign currency accounts, but don’t properly hold reserves for them, so the security is there until it isn’t.
These appear to be cases where government regulation was imposed to limit access to foreign currency. Not, as you seemed to be insinuating ("but don’t properly hold reserves for them"), any problem with banks carrying insufficient reserves.
So, there was neither a technological problem moving fiat in our out of the country that would be amenable to a technological fix, nor unintended weaknesses in the regulatory regime covering local banks. Rather, it was deliberate government policy.
> These appear to be cases where government regulation was imposed to limit access to foreign currency.
It’s not « access to foreign currency », it’s « access to your own deposits ».
Cuz the banks and/or the central banks spent/seized the foreign currency before you, the depositor, could spend them. So much for trying to protect your assets by holding them in foreign currency.
So you are saying that there are countries where USDC is legal while opening a foreign brokerage account like IBKR and converting your currency to USD is illegal? And this is not just a perceived loophole? Could you give an example of a country like this so I could google?
Important question is that what would happen if someone started asking pointed questions? About why do you transact in this and doesn't it go against laws. Would the stance actually hold...
Yeah, how is this different than black market trading (which happened a lot in ex-communist countries including mine, but the currency traded was usually German mark).
Except it does a lot more than that as highlighted here. It's not just a USD + exposure. It's pretend to be USD + its own set of risks. I'd rather buy USD or if you can't then do something else.
It is also kind of an abstraction over cash and treasury bonds. A more liquid fractionalised cash/bond unit.
Though that seems to have been the problem here.
The original idea with a 100% collaterilised peg was that the entire reserve would be cash. Somewhere along the way treasury bonds were considered cash equivalent. Which on the face of it seems sort of reasonable but clearly they do have a different risk and liquidity profile. This allows the centre consortium to earn a yield.
So I'm not sure I think a USDC is a dollar, but also I'm not sure it's particularly different to what banks do with deposits to earn a yield.
One difference is you can reinvest the same USDC to earn a yield while the underlying backing USD also earns centre a yield.
Having the entire reserve as cash wouldn't exactly help here - imagine if 30% of USDC's total reserves was in Silicon Valley Bank, rather than just 30% of their cash. (I think I've pointed out before in discussions of Tether etc that stablecoins can't safely just hold their rexerves as cash in a bank account because banks can and do fail and FDIC protection basically does nothing at this scale, but I wasn't expecting it to be demonstrated quite so spectacularly.)
> The original idea with a 100% collaterilised peg was that the entire reserve would be cash.
What is cash? Banknotes? You can't store 500 million pieces of $100 banknotes easily or safely.
Cash usually refers to deposits at accredited financial institutions like banks. Effectively this is an amount of money that the bank owes to Circle. The bank deposits money elsewhere, and the central place where all the money is distributed is the Federal Reserve Bank, the central bank of USA, that can never go bankrupt. OTOH, treasury bond is money that US Treasury owes to Circle, so they are not fundamentally different than cash, and in some cases it's even safer since US Treasury bonds are usually regarded risk-free.
Stablecoins are a cryptocurrency that conforms to the ERC-20 standard[1] so they can be used in blockchain applications that want something that implements that. USDC/USDT are therefore the closest things to USD that can be used in that way.
Obviously people differ as to the utility of those applications but that's what the "C" gets you. You can do those things if you want to. Of course there's quite a lot you can do with actual dollars that you can't do with USDC so you give up a lot also.
A more legitimate use case. An Ethereum contract that converts ETH to USDC. Say you are selling something (an item, security, service or whatever). You can accept payment in any token (in your smart contract) and the token will be converted to USDC.
USDC is an ERC20 token on the blockchain. This is required to work with smart contracts and dapps. You can swap USDC for any on-chain asset using uniswap or mix them up using a mixer like tornado cash. It also escapes any capital controls to hold USD which is a benefit for those who are outside US and live in poor or draconian countries.
Well, I'm pretty sure all credible banks in the US are all insured (both explicitly with FDIC and implicitly far beyond that) by the US government. That's a pretty big thing
That doesn't make them stable. The 2008 financial crisis was literally caused by big US banks. They then had to be bailed out.
This is not a symptom of a stable banking system. It's a symptom of the banks having a disturbing amount of power over the government, which is not a good thing. They were able to conduct what is essentially fraud at a massive scale with impunity because they knew the gov would bail them out when shit hit the fan.
I really don't understand what's so "stable" about this.
Well whether or not you think banking / government cooperation is a good thing, the fact of the matter is that even when large catastrophes occur, the system is brought back up on its feet.
You can't say the same for crypto systems, luna / terra being a very recent example.
Hey, nice straw man. Of course I think banks should cooperate with the government. I just don't think banks should be more powerful than the gov, which in the US, arguably they are in certain contexts.
And I never said crypto anything was stable on any level. I genuinely believe crypto has 0 usefulness for anything other than very specialised cases, usually to do with avoiding regulation.
The point I was making was that the banking system literally caused the large catastrophe. The fact that people seem to twist this into suggesting it's stable is just absurd.
Just like if your entire SAAS product horribly crashed, deleted and/or leaked a bunch of important customer data and so on, the fact that you were able to fix it doesn't magically mean the system was stable before.
What you're missing is the bailout is part of the system, and counts towards its stability.
In your analogy imagine your SAAS product horribly crashed and deleted customer data. So your cloud provider restored from the backups you had arranged and you were running normally soon after. Not ideal, but you had a far more stable system than someone without backups.
Asserting that bailouts are simply "part of the system" is just a cop out.
It doesn't respond to points about the behaviour of the bank which was key to my argument. Maybe read and try again.
I will repeat again at the risk of sounding like a broken record. There is no sane, logical way of arguing that the behaviour that led to the 2008 financial crisis is that of a stable, well-regulated banking system. If you believe otherwise, you are either on drugs, or have done no research, or both.
That only matters if you think that capability to be "bailed out" is legitimate in the first place. There is a pretty good argument to be made that allowing institutions to be "too big to fail" is directly enabling a lot of bad behavior, behavior that wouldn't happen if there was an understanding your bank can fail and you will not be compensated as a shareholder, only as a depositor under FDIC
I'd say not majority of the banks or anything like that but top ones like Goldman Sachs (Apple's choice) is more stable than all 3rd world countries and their CB too. Because GS has money printer on their side, literally.
Is a bank a ponzi scheme if its assets don't exist also?
Like if a bank has $10B in customer deposits and one of their armored truck drivers escapes across the border with $2B, then some customers can't be paid back when they try to withdraw, does that make it a ponzi?
Banks also rely on “newer funds” (from loan payments) to pay “older requests” (customers withdrawing their deposits). When withdrawals from old requests rise so much that they can’t be covered by new funds, banks collapse.
Not just to pay old requests. To pay revenue sharing / dividends / interest to shareholders. A Ponzi scheme is repurposing inflows to appear as revenue to a fake business.
It was all fun and games while the crypto bubble was inflating. You basically could do no wrong, any mismanagement would be hidden away by the exponential appreciation of the underlying assets; just hodl until the next bull run and everything would be fine again.
When things stabilize and start going down, it's like the morning after the frat-party, bad things come to light. Crypto is fundamentally a negative sum game, it takes enormous resources to run and has generated a large number of self-minted millionaires that have cashed out and lamboed their earnings. There is very little actual marketable utility that crypto provides that could cover these large outlays, perhaps with the exception of facilitating money laundry and illegal transactions. I guess that's a business, but (hopefully) not a multi-trillion business suggested by the bubble's peak.
So it's inevitable the game must end with someone holding the bags.
Lol crypto is not what people launder with, its cash and major banks that have been caught over and over again taking dirty deposits. Cartels don't trade in public blockchains. Your ignorance is stunning.
The balance of reserves are held in T-Bills, which are liquid and typically can only be traded during market hours.
Ok I'll buy that if you or I wanted to sell treasury bills, but... if a company needs to liquidate $10B of treasury bills over the weekend, can't they just call up the CEO of JPMorgan and say "hey we'll give you 10 basis points over Monday's 9AM rate" and make a deal happen?
They can try, but if JPMorgan CEO is getting such a call it's going to be painful for you and you're going to be in a bad place for negotiating those 10 basis points.
Fair enough. Technically there's no guarantee that the treasury bill market won't lock up on Monday morning either, but I agree that's a more remote possibility.
> Circle held around $3.3 billion in Silicon Valley Bank, leading to a run on USDC which resulted in it trading for as little as $0.95 on some exchanges today (Mar 10, 2023).
It dipped as low as .82 on Gemini. I used the chance to buy some to settle a debt denominated in USDC on Compound, though I haven’t yet paid it back because transaction fees on the ethereum network surged too.
USD Coin is managed by a consortium called Centre, which was founded by Circle and includes members from the cryptocurrency exchange Coinbase. Circle used SVB.
Similar to SVB, from what I understand. SVB parked several billion in treasuries when rates were at ~1.6%, when interest rates went up, that portfolio drew down, they exited with a loss, this triggered a run.
So if Circle has 70% of its reserves in T bills, they possibly took a market to market loss too, depending on how they were hedged.
(Disclaimer: i have not seen SVB balance sheet, nor Circles.)
Not nearly the same kind of losses, I don't think. The drop in value of bond-like investments is heavily affected not just by the change in interest rates but also the duration: long duration bonds drop much more heavily because the total amount of interest people now expect over their life is much higher. The interest rates on three-month Treasury bills has barely increased over the last few months (which is obviously the longest they could've been holding any for), and then taking into account the duration and the interest they're receiving they shouldn't be looking at mark-to-market losses at all really.
I agree with your conclusion: holding 3-month t-bills virtually isolates you from interest rate risk.
But not because rates do not change (they do, a lot: for example 3-month rate jumped by over 0.5% in 2 weeks of Oct 2022). But due to the short duration such change barely affects the remaining interest paid by each bill, which is what determines bill's price.
Agree with the first part, short duration implies lower volatility. But we know that T-bills are zero coupon bonds, so holders are not receiving interest payments along the way, the interest is built into the redemption price. So forced selling because of a run for example, at a bad time, can mean a loss on the price and therefore no interest.
So USDC is currently trading at $0.93. Which, if you believe in Coinbase, is free money. And if you don't, then its very bad news for the company and possibly worse news for the banks that are keeping the USDC reserves, because they are about to have a massive bank run on monday.
It's only free money if the probability of depeg/collapse/bankruptcy is zero. One thing I've learned from Anchor protocol, Celsius, FTX, etc: The probability is never zero.
Well, a free 8% return over a weekend if all goes perfectly.
Interestingly Tether also reacted to this news by going up to $1.03 briefly. That's not really good either, but it makes sense as a symmetric thing. It'd be an arbitrage opportunity except the market is so broken you can't execute it reliably.
They will return to peg all right, just find more money, not a big deal. Too lucrative a cash cow - get $44B of deposits and ain't gotta pay a lick of interest.
Even crypto can't avoid the Impossible Trinity. Free movement of capital, a fixed exchange rate, and a steady money supply: you can only have 2 at once.
Well, not all USD is stuck in SVB, at least according to what they claim. If Coinbase knows that they have the reserves to back USDC, or 93% of the reserves to back USDC, then them buying back any USDC on the open market at 90% or less is huge amounts of certain profit, while everyone else has to gamble on what the Coinbase actual capabilities are and in many cases are willing to accept a haircut to gain certainty.
The problem is that Coinbase probably has no way to say for sure what percentage of the reserves will actually be liquid on Monday. Other banks which held USDC reserves included Signature Bank of NY and Silvergate, both of which are also looking shaky.
I think that only holds up while people still have faith in the coin. Once that faith is gone Coinbase can buy as much as they want the coin is worthless.
If it's fully backed by liquid stuff, they can just buy everything at $.90 and pocket the remainder 10% and get and early retirement.
If it's fully backed by illiquid stuff, the problem is how much the crash sale will eat from their 10% retirement plan.
If it's very illiquid and they can only sell it at 80%, the price of the coin will drop even more. If it's only illiquid for the weekend as they claim, it may go back to $1 on Monday.
I mean with their on chain liquidity. They’d have first right to honor the exchange with themselves so unlike someone else trying to redeem it, they have no counter party risk. Each $.80 token the buy on chain could write off a $1 USDC position.
That’s kind of amusing. By using a traditional bank to store their gold standard bullion, they had exposure to centralized banking risk, which was realized, and caused the crypto to get locked in.
The crypto people can take a W on this one, though. USDC transfers still work, so there's no cash flow problem... as long as you can buy your tomatoes with USDC, this won't cause you problems.
Sure, and paying with crypto is always going to be more painful unless you use an exchange, which is just a bank with less regulation(ok maybe not in the US, since banks are barely regulated there anyway). Which again means it will never catch on unless it just becomes a conventional currency. Which, btw is a sociological inevitability anyway(I will die on this hill, try me). Decentralisation never lasts, see countless examples of that with decentralised protocols(including crypto! Which is literally why this thread is here).
Is it useful for people in countries with shitty governments? Very much so, it seems to me. Which is great. But that is not an argument for its intrinsic value as opposed to normal currency in a country with a functioning economy and government.
Mycorrhizal networks, to pick just one of myriad counterexamples, would like a word. Decentralization is just something that humans are (so far) bad at designing for.
> paying with crypto is always going to be more painful [than fiat] unless you use an exchange
Always is a long time. As governments figure out how to add features to fiat via CBDC's I can definitely image some bloat that would make paying in fiat needlessly complex. It's not like cryptocurrency has the market cornered on bad decisions.
We're talking about complex social structures here, not fungi. The fact that you bring up fungi is just absurd. It proves beyond a shadow of a doubt that you have no understanding of what I was getting at.
Well then perhaps you should be more specific, because there are obvious counterexamples to the generalizations you're throwing around.
USDC is a bridge across which supply and demand signals flow between centralized and decentralized networks.
Mycorrhizal networks are a similar bridge. Both are complex social structures, but only one is falling apart.
If we're going to get this right, it's not going to be by writing off cases where this kind of problem has been elegantly solved, especially in the absence of alternatives to try.
The point of crypto is to you from making rules about other people’s money. The state sponsored looting stunt the canadian government pulled off last year would be impossible with crypto. Likewise would PDT laws and similar regulations governing what other people can choose to risk.
I don’t care what you think about vaccines. It’s a question of whether or not you believe force is only justified in response to force, which you clearly don’t. So as I was saying, crypto does a great job of keeping your fingers off of other people’s wallets.
This is mostly about tracing crypto transactions. I don't see how the government can't just seize your keys, or freeze/seize your exchange assets. I can think of ways around key seizure if you literally just memorise your keys, then only storing them encrypted. But now we're talking about some intensely tech and security savy antivax truckers here...
Coinbase recently "unified" USD and USDC on Coinbase Exchange, trying to pretend they are the same thing. Absolutely boneheaded move. I expected it to cause problems for them eventually, but I'm surprised it was so soon...
If coinbase had kept 7% of their customers’ dollars in an account at SVB, those would be in the same situation though coinbase might have been able to dig into equity to make customers whole.
So many people were expecting it would be BUSD that would de-peg, and now it's USDC, which was considered to be among the safest and safest from regulatory pressure. Goes to show how the consensus is often wrong and how hard these things are to predict.
> Goes to show how the consensus is often wrong and how hard these things are to predict.
Seems like everyone is just making things up. I'm not sure of the split between "I'd like something to be true" and "I'd like someone else to think it's true".
Of course they wouldn’t have exposure to a bank in the US. There’s a reason that Tether has to do business with the more dodgy kind of offshore banks… Their exposure to any banks is likely far, far smaller than their claimed cash reserves, so it’s unlikely to be a bank crash that stops the Tether musical chairs…
You do realize that everything Tether says is a lie ?
It's all just a huge scam.
It's not easily provable with Treasuries, but it was easily provable when they claimed to hold something like the 8th biggest position in US commercial paper - which is not traded anonymously - and no commercial paper trader ever traded with them.
Tether has lots of experience in this field. They were "pioneer" and they went through a lot worse: Tons of FUD, the Bitfinex exchange hack, lawsuits, bank runs etc...
In short, they are battle and stress tested to the maximum.
I don't know whether you're uninformed or deliberately misleading, but that's entirely wrong. He fell after he confessed his crimes to his kids and they informed the FBI (on 2008-12-10, with his arrest the very next day).
However, people had been informing the SEC with suspicions a decade earlier, as recounted in the book No One Would listen: "Madoff Securities LLC was investigated at least eight times over a 16-year period by the U.S. Securities and Exchange Commission (SEC) and other regulatory authorities."
> Tether has lots of experience in this field. They were "pioneer" and they went through a lot worse: Tons of FUD, the Bitfinex exchange hack, lawsuits, bank runs etc...
Crypto was supposed to liberate you from the traditional banksters. Instead it’s an impenetrable smokescreen where you’ve got uninsured credit risk with institutions in Silicon Valley and the Bahamas and who knows where, and you won’t know until the edifice cracks and your money is stuck. Not a terrific improvement.
Of course the Bitcoin maximalists will shake their heads, mutter about self-custody, and then go on conducting their actual finances in dirty fiat because Bitcoin is nearly impossible to use for anything that people actually want to do.
Don’t have any horses in this race, but this feels like a straw man. Getting told to go die by a centralized exchange is exactly the kind of problem that crypto solves. The trouble is a ton of web3 startups (like coinbase) worked to undo this feature to improve usability. Pretty much every crypto person I know who has been in it for more than 5 years will insist no keys no coins. A lot of the innovation in web3 consisted of pulling back the decentralization inherent in a lot of blockchains.
I think the "no keys, no coins" crowd definitely has the right idea, but the existence of cryptocurrency exchanges is a sign that for many people decentralisation isn't usable enough just yet. These exchanges hold billions exactly because using these currencies just like real money isn't practical enough, or isn't the intended target of the people trading in them.
I think cryptocurrencies suffer from the fact most people seem to use them purely for speculation. I can't remember the last time I've paid by cash but I've never seen any store accept USDC or Dogecoin or anything else. Some online stores used to take cryptocurrencies but they've all stopped as far as I can tell.
Mayne this isn't true in other countries. I can imagine people in Argentina or Turkey or Venezuela using cryptocurrencies because their official currency is even less stable than your average cryptocoin and because foreign currencies often become available in limited numbers when banks struggle to contain their slipping currencies, basically sidestepping the government or the banking system. I haven't seen any evidence for it, though.
I wonder how banks being closed is impacting Coinbase's willingness/ability to redeem USDC for USD.
Since Coinbase can (at least in the US, to my knowledge) also not transfer any USD out on the weekend, shouldn't it be risk-free to take on any USD liability over the weekend, at least when considering USDC itself risk-free?
I'd call it stable as long as everybody who wants to trade their cryptocoins for real money can still get their dollars out. If that's the case, you can sell the cryptocoins online for less money if you want, but that'd be a bad sale because you're essentially giving up 10% of the value for no. Good reason (at the time of writing, value will fluctuate).
If this panic turns out to be nothing and the value will recover, some people panic trading right now are going to be at a loss. If trading in tokens for dollars doesn't come back spoon, the value may drop more and the panic sellers may be the ones that made the right choice by selling early.
The stability now hinges on whether or not cryptocurrency can be turned into real currency. At the moment, conversions are dropped, so it makes sense that the value has dropped. I don't believe for a second that this has to do anything with "banks closed during the weekend", I'm assuming the people behind the platform are now trying to figure out how to get liquidity with billions tied up in a shut down bank for the foreseeable future (or forever if SVB turns out to be insolvent after all). Maybe they can sell shares or trade other kinds of cryptocurrency reserves to make up the difference so exchanging USDC for real money can continue (probably bringing the price back up to a dollar immediately), maybe they can't and they're doomed.
If you have faith in the stablecoin, this may be the right moment to basically buy dollars for a 10% discount. If you don't and you have some money tied up in crypto exchanges, this is the moment to consider getting your money out before the impact of the depeg spreads.
If they can get enough real dollars to fulfil the demand, this may just prove that this is a viable mechanism, showing how stablecoins can survive with a significant amount of their real money inaccessible. It ain't over till the fat lady sings!
Just because you can't trade it 1:1 doesn't mean it is not stable. The only question is whether you'd still be able to redeem it 1:1 for USD in the future or not. This has happened before with Tether and they were able to service a huge bank run not so long ago.
Is the only way to make a true stablecoin is to create your own bank to hold the assets of the stablecoin?
The problem is a stablecoin holds reserves in a bank which the bank is then investing in non liquid assets which puts you in the current predicament. On paper USDC had these cash reserves, but in reality if you follow the trail all the way down you find out that those cash reserves are actually MBS’s and 10 year bonds.
A stablecoin which operated it’s own bank could guarantee that all reserves are actually being held in cash ready to wire transfer at a moments notice.
Haha, after a decade of FUD, turns out USDT were more cautious and diligent with their funds, than the "regulated and transparent" USDC. Still risky, of course. No substitute to holding proper BTC.
> turns out USDT were more cautious and diligent with their funds
This refers to facts not in evidence.
The potential collapse of USDC is not a reflection on the Tether fraud in any way. Outcomes in one are not evidence for or against anything in the other and it is a mistake to conflate them.
Note that this is not because of mismanagement at Circle. This is because these banks bought 10yr bonds and MBSes and now that there is a bank run they have to take huge losses if they have to liquidate. Circle in fact managed this really well IMHO with 75% backing in 36 day t-bills that can be liquidated fast.
Circle/USDC apparently was the one that told SEC to go after Paxos/BUSD. USDC depegs and then Coinbase halts USDC/USD trapping people to either sell for a loss or wait for a miracle everything works out. The irony of it all.
Even if USDC eventually manages to regain the peg, it seems likely this will cause major long term damage to adoption. Who wants to hold a "stablecoin" that can sit at a 7+% discount to par for over a day?
Seriously, just a tweet? Not even press release, let alone Q and A for breaking one of the core promises of the company. While I still think the deposits are safe, Coinbase should outline their worst case plan on this.
BTC crashed, stable coins crashing . Financialization means new, unforeseen risks are constantly showing themselves due to the intricacy of the interconnected system. Failure of stable coins will probably lead to sub 10k $btc for sure. Already BTC crashing now on this news after an attempt to rally. FTX was just $20 billion, stable coins combined are $150 billion....
Startup A had 10M in SVB.
Startup B had 10M in USDC.
Startup A is probably closing down, let's hope not and wait until Monday for a bailout.
Startup B cut losses and walked away with ~9.2M, on a weekend.
There is something to learn here about counterparty risk and outdated regulations/legislations. SVB from a time when no credit cards existed, USDC from a world where the iPhone had already been invented.
You can hedge the risk of your own bank failing by purchasing put options on its stock, assuming it trades publicly and has an active options market. I don’t know anyone who has ever done that, but it’s a neat idea.
I think Stablecoins systems are more resilient than traditional banks in bank runs.
In Case of a traditional Bank Run (SVB), pulling the money out is the overwhelmingly best thing to do due to game theory logic. This means once a bank run starts, there's no stopping it.
But in Stablecoins, the coin "depegs", this gives people a reason to actually buy and support the coin if they think insolvency won't happen.
Circle/USDC fooked around Paxos/BUSD and now they are finding out. All the xenophobia towards Binance showed who the real ones are. CZ is Canadian too and grew up there.
Circle held around $3.3 billion in Silicon Valley Bank, leading to a run on USDC which resulted in it trading for as little as $0.95 on some exchanges today (Mar 10, 2023). This represents around 30% of USDC's cash reserves and 7% of its total reserves. The balance of reserves are held in T-Bills, which are liquid and typically can only be traded during market hours. Coinbase itself has around $2B of USDC on hand. Circle's rumored exposure to Silvergate's collapse is also a concern.
If more than $7.8B of USDC were to be liquidated over the weekend, USDC would be effectively insolvent. Freezing trades until the market reopens limits this. USDC should rapidly stabilize due to being backed by very liquid hard assets, but it will probably lose significant marketshare to Tether.
UPDATE: USDC Liquidity pools on other exchanges are becoming completely drained, pulling down the peg. https://www.reddit.com/r/CryptoCurrency/comments/11oaz39/coi...