USDC depegs as Circle confirms $3.3B stuck with Silicon Valley Bank | Hacker News Reader

USDC depegs as Circle confirms $3.3B stuck with Silicon Valley Bank

cointelegraph.com

52 pointsthesecretceo29 comments

I would bet that most stable coins have exactly the same kind of exposure that SVB had. Overexposure to long term bonds bought at rock bottom prices

You mean rock bottom yields, right?

Yields yeah

You can do a little bit of math on recovery scenarios for USDC and they imply much better prices than 90 cents. Don't think this means it's a good trade to go buy at 90 cents though.

If Circle opens up redemptions on Monday there will almost certainly be a run. There's no reason to think that after the dust settles, you'll have something worth more than 90 cents.

Circle will either all of their money back from SVB (most likely) or a large proportion of it back. There's almost no chance that they get nothing back. The current price seems to assume the money is gone forever. Seems odd to me.

If Circle is healthy they can make tons of money buying USDC at a discount.

The fact they’re not doing it should tell you how solvent they are. Buying their own coin is a guaranteed 10% instant profit, why are they not moving?

Isn't it even their duty to buy it?

I don't know how USDC is set up. But I thought stablecoins work like this: The creator sells their coins at $1.01, so it will never go beyond $1.01 as it would be cheaper to by from the creator. They buy their coin at $0.99. So it will never go below $0.99 as it would be better to sell to the creator.

Yes, presumably redemptions will remain open come Monday. As far as I know Circle creates and redeems at par, they don't charge 100bps or whatever.

If they buy and sell at $1, how do they finance their operation?

They buy treasuries and collect 4.5% on $40 billion.

That is definitely not how USDC is set up. The creator takes 1 USD, and gives back 1 USDC and vice versa. In this case, some of the USD held at SVB disappeared, so Circle has less money for the USDC -> USD redemptions. There needs to be a 1:1 backing, otherwise a stable coin is just smoke and mirrors.

    creator takes 1 USD, and gives back 1 USDC and vice versa

How do they make money then?

Transaction fees I think?

They invest the USD. If the investments work out, they keep the profits. If they don’t, the customers just got crypto’d

Short term treasuries. They're a liquidity provider for the US government.

Great point. What could another reason be for not doing so?

That right now they don’t have enough cash to buy them, because the cash is locked in an SVB account.

This makes no sense. Circle's holdings are backing USDC. They can't use the money backing other USDC to buy more USDC. That's just market manipulation.

That's the whole point of a peg. If your thing goes below the pegged value, use your other assets to buy until your thing reaches pegged value (and vice versa). That's what "backed" means.

You are confusing a "peg" with "backed"

Circle have $1 which you can redeem each USDC for.

They don't theoretically have extra cash lying around to buy USDC at discount, and they certainly can't use reserves for that (they are needed to serve withdrawals)

Hopefully they do have some corporate cash spare to buy up cheap USDC so that what they lose to SVB doesn't make them insolvent

They should be able to buy 1 USDC with $0.9 of reserve, destroy it, and have $0.1 left over in profit, no?

I fail to see the difference, note that the title mentions "depegs". If they buy 1 USDC at $0.9 with their reserves, they can remove the USDC, and keep $0.1 since they'll need $1 less reserve. How is this fundamentally different from a peg? This is exactly why nations with pegged currencies keep foreign cash reserves.

Backed only implies that the stablecoin creator can redeem 1-1. It doesn't imply anything about whether the creator takes actions on the open market to try and manipulate the price to be at par.

My instinctive thought is that the responsible thing to do here is to pause redemptions for a while to see how the SVB thing plays out and then lower the face value of the usdc to align with their reserves.

> reserves

So likely 0?

The thing that caused this was the news that they have at least $3.3B in reserves. SVB uninsured deposits aren't dropping to zero, or anywhere close.

The article mentions that only 3.3B out of 40B of reserves were in SVB in the first place. I'm not too well-read on the SVB situation but some of those 3.3B may additionally be recovered.

Lowering face value is not an option if they intend on being a going concern. Their core business is maintaining something that's worth a dollar and they can't do that, then the market will move on to other things. It'll be permanently an unwinding operation.

Their best play right now would be to find some big pocketed investors with on chain assets. Have them buy USDC on-chain for $.90 on the dollar, write off the $1 redemption value with a $.10 bonus, and defer redemption on those tokens until they figure out the liquidity situation. It'd be a crazy bet and requires on-chain assets to kick start it, but the investors would be making a decent return in exchange for delaying their redemptions.

Would you take that bet? It’s likely that the exposure is similar in nature for their other assets

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