Coinbase suspending USDC:USD conversions over the weekend
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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...
It's so ridiculous I just have to kind of admire it. It's like a cathedral of human hypocrisy.
Is it audited by the SEC or some "auditing firm"?
A Ponzi scheme pays a dividend or share of fake “revenue.” Stablecoins don’t make money, unless lent out.
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?
Terra/Luna anyone?
If the US banking system starts failing, it absolutely should affect USD stable coins backed by exactly this banking system.
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.
You can't say the same for crypto systems, luna / terra being a very recent example.
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.
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.
So, the "C" makes USD exposure available to anyone worldwide, assuming you have e.g. an Ethereum wallet.
Messy, inefficient and UX could be way better, but it works and is cheapest for everyone involved.
https://amp.scmp.com/business/banking-finance/article/300879...
https://enterprise.press/stories/2022/10/09/major-local-bank...
https://www.aljazeera.com/amp/economy/2022/2/3/lebanon-us-do...
> No withdrawals were allowed from accounts denominated in U.S. dollars, unless the owner agreed to convert the funds into pesos.
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.
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.
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.
And if only we're true to the "original idea" (whatever that might be). As seen with lots of coins / exchanges it's been a front to do something else.
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.
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.
[1] https://ethereum.org/en/developers/docs/standards/tokens/erc...
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.
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.
(I'm no expert though, correct me if I'm wrong)
Edit: Parent comment is now correct
That's why Coinbase are stopping withdrawals.
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.
DAI has quite a substantial percentage of USDC in their reserves as well.
We could witness another death spiral. Let's see how events turn out to be.
https://twitter.com/stablekwon/status/1523733542492016640?s=...
As someone who only observes crypto, the past 4.5 hours (at my time of writing) has been interesting to watch.
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.
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.
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.
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.
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.
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.
Or at least nicely told to go and exchange it for real money (local currency) somewhere, then come back and try again. :)
And your specific comment that started this didn't read like you are only argued about developing world. My 2c.
If it's in advance of giving you your coffee, no, they could demand you pay in dogecoin only if they wish.
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.
But now that you point out "developing countries", that does seem more likely. :)
(In small towns it may be more difficult, but not impossible, specially if you are nice.)
Here are a few cherry picked examples
https://www.reuters.com/world/americas/half-payments-caracas...
https://www.tripadvisor.com/ShowTopic-g293974-i368-k4798488-...
https://www.voanews.com/a/lebanon-leans-on-us-dollar-to-cope...
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.
Kenya and Egypt are two examples.
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.
In other words, money.
_Libya_
2008 https://www.cfr.org/blog/libya-shunning-dollar (Libya Shunning the Dollar?)
2011 Invaded
_Iraq_
2000 https://www.cnn.com/2000/WORLD/meast/10/30/iraq.un.euro.reut... (U.N. to let Iraq sell oil for euros, not dollars)
2003 invaded
2006 https://www.aljazeera.com/news/2006/2/14/syria-picks-euros-o...
No direct invasion but proxy war (lessons learned).
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.
How could you mistake a coffee shop for a country?
Seems like you want to misread me on purpose?
If they get a deal with an oil selling country that says otherwise, USA sends in the army (usually to the seller, not the buyer).
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.
I assume per your definition of "country" Norway should be a country as well.
Norway is a major party in selling oil and gas, but doing it so in NOK. Norway is not even part of NATO. At least until now.
So when do you expect an attack by the USA military?
"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."
https://offshorenorge.no/globalassets/dokumenter/naringspoli...
Also the measurement is NOK: https://www.norskpetroleum.no/en/production-and-exports/expo...
NOK is recommended. That document doesn't say what currency is used for actual transfers.
Its neighbors Sweden and Finland are EU members whose citizens have recently come to widespread agreement that NATO membership is desirable.
Odd… because the head of NATO is Norwegian.
Your entire comment is completely misinformed.
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.
Wouldn’t this expose those people to exchange rate risk that they could completely avoid by holding USD instead?
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.
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".
Happy to bet on that ;)
this is one of the silliest comments I've ever seen on HN.
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.
Few understand.
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.
Only in the PR sense. A rug pull is inevitable.
On the bright side, when it crashes it'll take what's left of crypto with it.
[0] https://www.wsj.com/articles/crypto-companies-behind-tether-...
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?
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.
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.)
Although, still room for losses with those numbers ($50B) https://ycharts.com/indicators/3_month_t_bill, and make them more likely to want to hold to maturity.
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.
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.
DAI fell below .90 even though it’s so overcollateralized that even the 100% loss of SVB funds shouldn’t make it insolvent: https://news.ycombinator.com/item?id=35105876
>USDC Liquidity pools on other exchanges are becoming completely drained, pulling down the peg
Nit: liquidity pools (at least of the kind described in the link) are decentralized and don’t live on an exchange.
there are no freebies in finance. no one knows what is left. probably less than many think.
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.
Whether that is still the case is the big question.
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.
It’s like some sort of wacky deadlock condition.
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.
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.
Btw how invested are you in crypto? Valid question, y'know, enumerating biases.
https://www.investopedia.com/terms/p/patterndaytrader.asp
It’s as valid of a question as asking you if you hold USD.
As for dollars, I hold zero. Same for bitcoin, ethereum, ScamCoin, and RugPullCoin. Your turn. Defensive are we?
And how about those holdings?
https://www.forbes.com/sites/kellyphillipserb/2020/09/14/irs...
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".
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.
In short, they are battle and stress tested to the maximum.
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."
https://en.wikipedia.org/wiki/No_One_Would_Listen https://en.wikipedia.org/wiki/Madoff_investment_scandal
They're experts in fraud and deception.
It turns out if you have no assets you have no exposure.
You can't have exposure, if you don't have any real assets.
Frankly, this is all mind blowing - it will be in all finance books in the future, and we have the privilege to see it happening.
How do you know?
Tether didn't hold its peg though; it went up to about $1.03. For a stablecoin going up is as bad as going down. https://coinmarketcap.com/currencies/tether/
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.
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.
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?
How many of them need to fail before it is clear this is not a viable mechanism?
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!
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.
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.
In the balance sheet a cannot find the unrealized loss
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.
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.