At last yesterday the cryptocurrency USDC returned to the value of $1.
USDC is a stablecoin crypto token, whose value in theory should always remain in line with the underlying. Indeed, its underlying asset is USD, which is the US dollar.
Last night its market value returned to around $1, after falling as low as $0.84 in recent days.
Crypto: USDC’s loss of its peg with USD
USDC (USD Coin) is a token fully collateralized in dollars or similar. This means that for every USDC issued, the issuer (Circle) holds one US dollar, or equivalent assets such as US government Treasury bonds, in cash.
However, as it emerged on Friday, part of Circle’s reserves were deposited with Silicon Valley Bank (SVB), which went bankrupt in recent days.
The thing is, by the time Circle went public with the news that $3.3 billion in USDC reserve cash were effectively sitting idle in SVB accounts, the bank by then had been shut down by the authorities, and thus could not be used.
Circle’s way of maintaining the USDC market value peg at $1 is simply the ability to redeem all USDC at any time by receiving an equal number of USD in return.
Since there were 43.5 billion USDC circulating, theoretically Circle should have had assets with a total value of at least $43.5 billion on hand to eventually meet all redemption requests.
But with $3.3 billion less, the reserves at that point were only $40.2 billion, or 7.6% less.
The market at that point reacted by selling USDC tokens en masse in exchange for other stablecoins (mostly USDT), fiat currency (mostly USD), and to some extent probably Bitcoin.
Since the peg loss was triggered after banks closed for the weekend, Circle as usual had to temporarily suspend USDC redemptions at par, only to resume them on Monday morning when banks reopened. In fact, US dollars are sent to USDC token redeemers through banking platforms that do not process transactions over the weekend.
The recovery of the peg
Before banks reopened yesterday morning, however, there were already two pieces of news that had helped the USDC price recover somewhat. In fact, as early as the night of Sunday to Monday, the market value of USDC had climbed back up to $0.98.
The first news was that Circle had stated that it was willing to cover the hole entirely from its own assets.
While this seemed more a promise than a certainty, if nothing else it had served to reassure the markets that the company intended to do something to make USDC recover the peg.
However, it had not made it clear where it could find $3.3 billion, but the assumption nonetheless did not seem to be at all far-fetched.
But it was the second piece of news that swept away any remaining doubts: the US central bank (Fed) said it was ready to cover in full the shortfall concerning the deposits of the failed bank’s customers.
In other words, while not saving the bank (which remains bankrupt), at least all depositors will be able to recover all their deposits in full, including Circle.
At that point, the hole that had been created in USDC’s reserves theoretically no longer existed, even though the company had not yet gotten its money back. In fact, even before the banks reopened, and thus Circle reactivated USDC’s par redemptions, its market value was back above $0.99.
The redemptions
It is worth noting that the problem was not caused by Circle, but by an external event that was totally unpredictable for them.
Moreover, the solution found by the Fed completely solves the problem, thus making Circle and USDC regain much of the reputation lost during this brief slump.
In fact, yesterday, following the reopening of USDC redemptions, the tokens that were returned were not many: they were less than one billion out of 40 billion, or only 2.5%. This means that more than 97% of the USDC still in circulation have not been returned.
It is worth mentioning that in the previous two days USDC’s market capitalization had already fallen.
Prior to the release of the news of the $3.3 billion stuck on SVB, USD Coin capitalized 43.5 billion, but before the reopening of redemptions yesterday morning it had already dropped to 40.1.
Thus USDC lost 3.4 billion in capitalization between Friday and Sunday night, and then lost another 0.6 billion yesterday when Circle reactivated redemptions.
In total it lost 4 billion in capitalization, or just under 10% of what it had before the collapse.
Meanwhile, its main rival, Tether’s USDT, rose from 71.8 to 72.3, bringing its dominance to an annual record of 56%, while USDC’s dominance fell from 33% to 30%.