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USDC Depegging: Can USDC Go to zero like UST?
The USDC stablecoin has for very long championed the market and has also been the second-largest stablecoin for a while now. Created by Circle Internet Financial, USDC holds an impressive market cap of around 40 billion dollars.
Recently after the catastrophic downfall of the Silicon Valley Bank, the USDC stablecoin was de-pegged from the US dollar. The relationship between the US dollar and USDC stablecoin was earlier that of a 1-to-1 peg. However with speculations and fears spreading in the industry regarding the potential impact of the collapse of the Silicon Valley Bank, brought the coin down from 1 dollar.
What are the effects of USDC depegging?
On Kraken, the value of the trading pair of USDC/USDT fell down to approximately 0.94 dollars. This is in fact its lowest value after April 2021. Nansen, one of the most reputed crypto tools, reported that around 1.6 billion dollars worth of USDC was burned by Circle Internet Financial. This took place on Friday and resulted in some coins being removed out from circulation, even though Circle did begin the minting of some new coins, the ones that were added to the circulation were very few in comparison to the ones that had been destructed.
These events also had an impact on USDC’s market capitalization. The market cap which once was at around 43.5 billion dollars, now has dropped down to 42 billion dollars.
What could USDC depegging mean for the industry?
It is vital to understand that USDC is a very important stablecoin, ranked second in the market after USDT. The value of the stablecoin is supported by government bonds of the United States of America and fiat assets, and hence it forms the spine of the crypto stablecoin market. Due to this, whatever is happening with USDC, has sent shivers in the industry and people are worried about the stability of the token. USDC being such an integral component that ensures the basis of the crypto industry is secure, any questions on its stability could have ripple effects on the entire market. When stablecoins like these move away from the underlying currency that they were pegged to, a worry regarding their financial standing is bound to be raised.
According to the report by CoinDesk, the company spoke with a representative at Circle who mentioned how Silicon Valley Bank was among the five other banks who were responsible for managing around one fourth portion of the funds of USDC that were represented as cash. They also said that since it is still unclear “how the FDIC receivership of Silicon Valley Bank will impact its depositors”, and as they wait for some transparency on this, they will make sure that both the Circle Internet Financial and the USDC stablecoin function as per usual.
According to the tweets by Circle, around 3.3 billion dollars of the 40 billion dollars of USDC are still held as reserves at the Silicon Valley Bank.
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Will USDC drop to zero like UST?
Last year we saw how UST with once more than 18.5 billion dollars marketcap collapsed within few days, something hardly any crypto investors could have forecasted. However, UST was an algorithmic stablecoin.
At that time, USDT, BUSD, USDC and TUSD looked safest of all stablecoins as these stablecoins are asset based.
Last month, US authority imposed ban on Paxos from issuing anymore BUSD and we saw the BUSD marketcap depleting. Further, Binance CEO CZ was seen distancing Binance from BUSD by calling it not issued by Binance.
And now, we are seeing USDC losing its peg because of the fall Silicon Valley Bank, where USDC has stored 8.2% of their cash reserve. Currently, USDC is trading 10% below its 1USD peg.
With the developments in the market being so recent, it might be a little too early to say anything with assurance on whether USDC could go to zero like UST. However, in our opinion, the chances of this happening are a little less since Circle is actively trying to find a solution to this debacle that started with the SVB collapse. Circle has come out with complete transparency regarding the amount they have stuck in the Silicon Valley Bank and we believe that the worst has passed us.
Even though 8.2% of the funds are stuck at SVB, it doesn’t imply that all money is lost. With an FDIC recovery process that we have seen before, an approximate of 94 per cent payout is possible, which means that the loss will be reduced to just 198 million dollars.
However, for CIRCLE to come out clean of this mess, there needs to be an immediate intervention from the US government, and save the bank. Remember, it is not just Circle but more than 1000 YC backed companies have been impacted by the bank’s collapse. And we could see a black swan effect not just in crypto but throughout the tech industry.
Looking at the positives, around 75% of USDC assets are in Short-Dated US Treasury Portfolio with a maturity date of 3 years or less. This goes to show that the void created by the losses, some of it could be potentially covered by the interest payments.
Despite that, it is sure to say that we are witnessing stablecoins at war with each other. In fact banks are collapsing and turning onto each other. This is what Ben Armstrong, one of the best crypto experts has to say “For longer than any of us have been alive, banks all around the world have leveraged money, influence, & power in order to control humanity. So far banks have stood together as a united front against crypto. As problems mount up tho, the banks are about to turn on each other.”