USDC: What's going on?
The crypto industry has again suffered another setback with a stablecoin, USDC. The magnitude of this setback will only be clear in days, weeks, and even months to come.
Given the volatile situation, Telcoin has announced a temporal suspension of USDC/USD cash in/out within the Telcoin App. This, however, does not impact holdings. It is unclear whether this will impact on TELx markets.
USDC is issued by Circle, a global financial technology company whose mission is to “raise global economic prosperity through the frictionless exchange of value.” USDC is a stablecoin that is pegged to the US dollar at a 1:1 ratio, which means that for every USDC token in circulation, there is a corresponding US dollar held in reserve. It was launched in 2018 as a joint venture between Circle and Coinbase, two well-known companies in the cryptocurrency space.
What happened
Circle has indicated that USDC is fully secured by cash and US Treasuries, making it a 100% collateralized asset. To be more specific, the USDC is secured by a total of 77%, or $32.4 billion, of US Treasury Bills (with a maturity period of three months or less) and 23%, or $9.7 billion, of cash held in several institutions, including Silicon Valley Bank (SVB).
SVB, a long-standing and dependable partner of the US innovation economy, recently experienced a typical bank run similar to those we saw during the 2008 financial crisis.
A bank run, often referred to as a run on the bank is when many bank customers remove their money from their accounts because they think the bank is, or may become, bankrupt and won't be able to reimburse them later. Banks usually do not have sufficient liquidity to withstand high withdrawal volumes.
SVB had huge losses, which caused them to sell long-duration assets to satisfy redemption demand. Due to a short-term liquidity crisis brought on by the settlement time for these assets, the Federal Deposit Insurance Corporation (FDIC) took over the management of the bank.
The FDIC is a US government-run organization that offers deposit protection to customers of American commercial banks and savings institutions. The Financial Act of 1933, passed during the Great Depression to rebuild confidence in the American banking system, established the FDIC. This was because of a high number of bank runs that occurred during the 1930s.
Since the DFIC has taken over SVB, then it will decide the future of the bank.
Silicon Valley Bank and USDC
While SVB holds a significant portion of USDC, it is worth noting that a considerable amount of USDC is not held with SVB. As indicated earlier, 77% ($32.4B) is collateralized with US Treasury Bills.
The world's most liquid assets are US Treasury Bills. Circle reports that BNY Mellon is responsible for safekeeping these reserves, while BlackRock oversees active liquidity and asset management.
The Bank of New York Mellon Corporation (BNY Mellon), founded in 2007, is a holding corporation for investment banking services with its main office in New York City. BlackRock, Inc., also based in New York, is a multinational investment firm. BlackRock is now the largest asset manager in the world, with a total of $10 trillion's worth of assets under management.
Circle claims that SVB still holds $3.3 billion of USDC's financial reserves. However, as of March 09, 2023, Circle had already initiated the process of sending these reserves to other banking partners. Although these transfers hadn't been completed as of March 10, 2023, when SVB "collapsed," Circle is confident that the process will be finalized in the coming days.
$1 billion of Circle's USDC reserves are maintained with Customers Bank. Circle also keeps USDC transaction and settlement accounts with Signature Bank. There are no USDC reserves at Silvergate Bank.
Customers Bank is a subsidiary of Customers Bancorp, Inc., a publicly-traded bank holding company. Signature Bank is a New York-based full-service commercial bank with over 30 private client offices throughout the US. Customers Bank and Signature Bank are significant institutions in the market for digital assets. Silvergate Bank was a Californian bank that suffered substantial losses following the FTX collapse. It was announced in March 2023 that Silvergate would liquidate.
What happens next
Based on what has been said, it is unlikely that USDC will collapse despite large volumes remaining with SVB. There is a high likelihood that the FDIC will finalize outstanding transactions and return USDC reserves to Circle, especially given that these were initiated before the collapse mentioned above. There is also a good possibility that SVB could be rescued or taken over by other investors.
While USDC has depegged against the USD, Circle has indicated that USDC will "continue to operate normally" while they await clarity on what will happen to Silicon Valley Bank depositors.
As far as Telcoin is concerned, the suspension of USDC/USD cash in/out within the Telcoin App has “no impact on your holdings and all other functions remain active. We expect this to be resolved very soon.”
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Disclaimer
The information and content (collectively 'information') provided herein are general information. The authors do not guarantee the suitability or potential value of any information or particular investment source. Any information herein is not intended, nor does it constitute financial, tax, legal, investment, or other advice. The authors have no affiliation with Telcoin or other persons or companies referred to in this article. The information in this article is based on the sources used.