Notes 3/12: USDC Peg

The price of Circle’s stablecoin USDC, which had lost its peg over the weekend amidst fears over its reserves, is inching its way back to $1. As of this writing, it is changing hands for $0.98, according to data from CoinGecko. On Friday, amidst drama surrounding the failure of Silicon Valley Bank (SVB), it had crashed to a low of $0.87.

Decentralized finance (DeFi) stablecoin DAI is also on the path to recovery after crashing to $0.89 yesterday. The stablecoin fell off its peg on Saturday because it holds a substantial portion of reserves backing its token in USDC. At the moment, it is trading for $0.96.   

Regulators Step In

Meanwhile, there was fresh trouble over the weekend in the form of a shutdown of Signature Bank – another crypto-focused institution that state regulators deemed a “systemic risk”. During its last earnings call, the bank’s CEO had said it was focused on reducing its exposure to cryptocurrency. Both banks are now under the control of regulators in receivership programs.

The Treasury Department announced this evening that depositors in the banks will have access to the full amount of their deposits, starting tomorrow morning. The Federal Reserve also announced a new Bank Term Funding Program that will provide one-year loans in exchange for high quality collateral, such as Treasury Securities, for institutions affected by SVB’s unraveling.

USDC’s price movements were also helped by a post that the company published yesterday stating its intention to make up for the shortfall in its reserves by deploying “external capital”, if necessary. Seventy-seven percent of the stablecoin’s reserves are invested in Treasury Securities that have yielded handsome returns, thanks to the Federal Reserve’s aggressive interest rate hikes.

The company linked to investment manager BlackRock’s site where a breakdown of its holdings, including fees charged by BlackRock for its services, are displayed. Clearly, the company is making significant efforts to maximize profits for its shareholders – members of the Centre consortium.

A Circle Game

The set of events towards the end of last week have, once again, demonstrated the inherent vulnerability of cryptocurrency money. A stablecoin issuer mints currency that is supposed to hold its value under all or, at least, most circumstances. Since last year, however, stablecoin de-pegging events are the first occurrences at the sign of trouble in crypto. Even the slightest hint of trouble has an exaggerated effect on such coins.

In mainstream finance, traders and arbitrageurs fulfill an important function by stepping in to fill the gaps when a crisis occurs. In cryptocurrency, however, industry actors are absent. So, USDC was forced to pause redemptions to prevent a run on its coin. [That it could arbitrarily decide to deny traders a profit-making opportunity is another problem, but business ethics are not crypto’s strong suit]. Tomorrow, when the stablecoin opens the redemption window, it will be interesting to see whether traders stick to reposing confidence in the coin.

More Regulations  

The announcement today by regulators is also another example of the spreading tentacles of regulation and government. Fed-sponsored programs with fancy acronyms {Care to cover yourself with TARP?] to bail out institutions became common during the last financial crisis. The announcement today continues the trend.    The financial crisis was an opportunity for the Federal Reserve to expand the scope of its operations, bail out banks, and exert control over the economy’s functioning. Bitcoin and cryptocurrencies were a protest against this trend. A crisis, precipitated by crypto this time around, has further entrench the hold of regulators over the economy.

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