An Update on USDC and Silicon Valley Bank
circle.com
circle.com
Did Circle and USDC trigger the sudden liquidity gap in SVP that triggered the fire sale of 21B at a loss? Is the crypto panic triggering the bank runs?
“Last week, we took action to reduce bank risk and deposited $5.4bn with BNY Mellon, one of the largest and most stable financial institutions in the world, known for the strength of their balance sheet and as a custodian.
$3.3bn of USDC’s cash reserves remain with SVB. As of Thursday, we had initiated transfers of these funds to other banking partners. ”
It seems unlikely that would be the case, 5.4B would represent only 2.5% of their AUM at the time of failure. However the Fed did reduce the bank cash reserve requirement to 0% in March 2020, so it's technically in the realm of possibility... but having to sell off assets after a 2.5% drawdown is analogous to being 40x leveraged.
It would be unbelievably poor risk management if this were the case, and seems more likely a much larger event than a few crypto companies (which are small in the grand scheme of things) withdrawing deposits.
I think on Thursday, SVB saw cash outflow requests over $40b in one day. USDC peg is so far below 1 right now there will definitely be a lot of par arbitrage Monday trying to withdraw.
Hopefully it doesn’t take longer than a day for them to settle treasury trades, and maybe some people have lost the keys to their crypto. They could also possibly have a line of credit with instant settlement assuming they’re truly solvent with marketable securities at market prices.
SVB went bankrupt - as a business: it can't pay its bills. People are reacting to this as if the deposits have vanished entirely.
If you think USDC is a shorting opportunity, short anything crypto. USDC is literally the second largest domino.
EDIT - Do you have a the $60+ billion figure? All I am seeing is a $2 billion dollar shortfall.
If the internet failed, all crypto would fail. Does that make it the biggest domino in crypto?
But isn't this the problem?
If over the weekend billions of dollars of USDC is purchased at less that $1 from people expecting to cash in on "free money" come Monday, Circle is going to have to be able to ensure that that actually happens, which could easily require more liquidity than remotely possible (edit: I just realized that Circle claims that back 1-to-1 with liquid assets).
Volume right now in USDC is at record highs. If all of those people are hoping to make free money on Monday, and it turns out Circle is unable to maintain that, then the entire USDC will crash almost instantly once people realize it's impossible to keep it pegged.
I'm far from a crypto expert so could you clarify what I'm missing?
It doesn't matter if it was already $1 right now. The assumption is that everyone purchasing USDC today when it was below $1 is planning on selling it Monday as a quick arbitrage.
Assuming the peg is restored by Monday, Circle is still going to have to have a lot of liquidity to meet the demands of a huge number of people trying to realize that $1. Again, today was the highest volume ever for USDC and presumably many of those transactions are people expecting to cash out Monday.
It seems very possible to me, that Circle will not be able to meet the liquidity demands of keeping the peg and fulfilling their promise of $1 USD for 1 USDC. If they falter at all, and the peg doesn't hold, then anyone holding will immediately panic and attempt to liquidate their position leading to a collapse.
The piece of the puzzle I was missing is that I didn't realize that Circle claims that they have cash reserves (cash and 30-day treasuries) equal to the entire USDC market cap. So anyone who trusts that Circle has the liquidity and cash on hand to payout everything views this as free money.
I would point out that this "arbitrage" existing for more than a brief moment implies there are lots of people who do not believe that Circle can meet these demands and are happily unloading their positions.
I thought 1 new coin is created for each new $1
However, another important question is what actually happens to that dollar - are they actually able to wire you that dollar if you hand them back 1 USDC? For 3.3bn of those dollars, we know they are not currently able to, since those 3.3bn are tied up in SVB, which isn't itself able to wire them to anyone. Hopefully, the rest of the them are more available, but it remains to be seen.
Circle can only redeem during bank hours, so almost everybody involved maintains a buffer of easily accessible dollars to paper over. However in any sort of stressful time these buffers get used up. With no buffer to satisfy the 1USDC=1Dollar, redemptions stop until bank hours and there's no arbitrage opportunity.
For the most part nobody really cares if one of these buffers gets used up because you'll just hold USDC inventory for size. But when the solvency of USDC is in question, nobody wants to hold USDC inventory, and so there's no buying pressure for USDC below $1.
Another factor is that even if you think the USDC fair is .97, not .92, buying below .97 isn't necessarily a good trade. You might be last in line to do a 1-1 redemption, and by that time, the hole isn't $1bn on $40bn but $1bn on $5bn.
My understanding was that the entire point of a stablecoin was to smooth transactions between other crypto currencies, so most of the buying and selling of USDC was to convert between one coin and "USD" while still remaining in the crypto ecosystem.
The entire reason the peg can remain is because one company, Circle, is guaranteeing to purchase it for $1. If you want to cash out a small amount, sure you can go through a company like Coinbase but if you try to cash out billions then that will just force Coinbase to go to Circle in order to maintain their own liquidity.
It's widely known that Circle backs USDC 1:1 with cash and cash equivalents. That's the value prop compared to Tether.
It doesn't have to be a huge mystery as to whether Circle can meet Monday liquidity demands. You could look at USDC trading volume since it de-pegged, set the buy/sell ration as you see fit - or even do some onchain analysis - then compare to Circle's cash reserves. This would be a worst case scenario.
Logic trumps puzzles.
USDC isn't an algorithmic stablecoin or backed by non-cash assets. It is a coin that is redeemable 1:1 for cash, always. They have approximately $40b in coins and is only "short" $3.3b. Right now the first 91% to redeem can still get a full dollar, not everyone who redeems gets 91 cents.
People who have no idea how it works are panic selling fearing a crash. Other people are buying up as much as they can because you're effectively selling someone a dollar bill for 95 cents, a deal I'd take every day.
That's what I realized after doing some more research. This is really a test of Circle's claims. If circle really has 1-1 liquid assets to cover all USDC, this is a non-issue and many people will make some very easy money after this weekend.
If, however, it's assets are not as liquid as claimed or not as 1-1 as claimed, then USDC and Circle will likely collapse Monday morning, quite possibly taking down Coinbase and much more with them.
Last night I bought at a ~6% discount on Gemini.
It's a terrible trade to make now though.
[1] which it isn’t; here’s what legit attempts at explanation look like: https://news.ycombinator.com/item?id=35113400
https://news.ycombinator.com/item?id=35113126
[2] if it weren’t, it would explained some of the terminology used, since the asker clearly isn’t deep in the business in the first place
https://www.binance.com/en/support/announcement/binance-adds...
Individuals in many countries (but not the USA) have access to Leverage Trading on Binance.
You could also use any of the following DeFi liquidity pools: https://nomics.com/markets/usdt-tether/usdc-usd-coin/markets
Send them to a null address or commit to burning them in software. If they can restore the reserve, they could remint them.
I'm a crypto bear (with modest crypto holdings for diversification), and I think this is an opportunity for these folks to step up to the plate and show they can meet these sorts of challenges. If you can successfully navigate a bank collapse, then maybe you deserve a seat at the table. I'm not holding out my hopes for USDC though.
But I concur - they are showing their true colors by not defending the peg.
Why should they? USDC is not an algorithmic stablecoin. For once, it's actually not a failure in crypto that lead to this depeg.
I'm not even sure they are allowed to do it by their own contracts with their clients as long as it is not clear that the USD at SBV is really lost.
This is already what happens with redemptions, which as per OP should resume on Monday.
This only has effect for coins with a fixed supply or at least of fixed schedule of supply.
it’s recovered to less than a 4% discount
If you pull your funds off CB into a DEX and then do the arbitrage, that's when they get unhappy.
Yes, that's happened to someone I know. Their account was locked as soon as CB figured out that is what they were being used for. They don't like just being a fiat ramp since it doesn't earn them anything.
The problem at Silvergate and Silicon Valley Banks is that they bought 10 year or 30 year bonds, not 3 month bills. Its a completely different composition, with completely different properties.
You betcha.
Here's the rates for March 2021. 3M would have gotten you 0.05% APY, while 10Y gets you 1.45% APY.
https://home.treasury.gov/resource-center/data-chart-center/...
Is this the one?
"10-Year Treasury Constant Maturity Minus 3-Month Treasury Constant Maturity" https://fred.stlouisfed.org/series/T10Y3M
The problem is that just when their long duration bonds lost value is also when their startup-heavy customer base needed their money out for expenses, and with VC funding dried up they weren't getting new deposits. SVB's problem was that their liquidity issue became a solvency issue when it became public that they were forced to sell their long duration bonds at a steep loss to cover withdrawals.
The bank would have had no problem if it was just the case of fewer new deposits. As to expense draw downs, those would have been ongoing and part of normal business operation.
If you knew that your bank was insolvent, would you withdraw your funds before SHTF? Or would you twiddle your thumbs until everyone else did that, and your accounts got frozen, with you sweating bullets over whether or not you'll be taking a haircut on your deposits?
Would your withdrawal be a 'panic', or simply a rational decision to not be the moron left holding what might be an empty bag?
He is wrong. This is just an accounting term / treatment. You can still sell them, and will obviously recognize the loss when you do. Had they been 3 month bonds, they could have been sold for basically full value and remained solvent.
Yeah, obviously the bank would have no problem if there were no bank run. But the reason there was a bank run was because the didn't have money because they locked their funds into bonds that subsequently lost all of their value.
Whether they were "held to maturity" or not, the fact is that they lost value. Not that they were locked away for 10 years untouchably.
The difference for many of them, compared to SVB, is that they have a much more diversified deposit base, so they don't have the same dynamic of the majority of their depositors all needing their money out due to VC funding drying up.
The fact that bonds lost value is really not an issue if they didn't need to liquidate them before maturity. After all, someone deposited $100, and SVB turned around and bought a bond for $100. If they were able to hold that bond to maturity, they would get $100 dollars back to make the depositor whole. The problem is that depositor wants their money back now while the bond is worth less than par value.
No. In your example, someone deposited $80 and SVB turned around and bought a bond for $80. In 10 years, that bond will be almost certainly be worth about $100. Because it’s reliable, theu can use that value for some of their long-view bookkeeping and projections, but it’s still an $80 asset purchased for $80 and worth $80.
Some months later, the market for those bonds starts to shift. That bond will still be worth $100 eventually, but now trades for only $70.
This puts SVB into a different risk position than they were previously. While their books still reflect a $100 asset in 10 years, they actually hold less value in assets now than they started with and are more vulnerable to a run than they were previously.
Where they could have immediately sold that $80 bond to meet an $80 obligation, they can now only sell it for $70. That’s a problem. It’s a bearable problem as long as nobody asks for too much money at the wrong time, but the fact that they’re so much more vulnerable invites people to do exactly that, in order to make sure they’re not caught as the last one out the door.
Yes, the bank could hold the bonds to maturity to get $100 back in 10 years. But that $100 dollars in the future is worth much less than having $100 now.
SVB depends on earning net positive amounts on their interest income to continue operating. Turning $100 into $100 10 years later is the same as turning $100 into $90 now (illustrative numbers. The issue is of course varying interest rates).
It seems like madness to leave yourself totally exposed to a situation like this. Rates rise, your investments fall and your depositors want their money back doesn't sound beyond the realms of the imagination.
https://www.cnbc.com/2023/03/11/stablecoin-usdc-breaks-dolla...
Obviously the market had some doubts about this today and then liquidity issues drove the price down. I'm somewhat surprised that it climbed back up this fast which means that the panic seems to be over (for the moment).
Or maybe what we're talking about is a broken peg. Circle was willing to pay $1 USD for a USDC, but they're no longer willing to pay that (at least temporarily). Maybe countries have seen their pegs broken because they couldn't actually defend their peg. They'd promise "we'll give you $1 USD for every 2 PegCurrency" and then someone would come along with a ton of PegCurrency and ask for dollars and they wouldn't have enough dollars to give them. A peg only lasts as long as you have the currency to keep paying at that rate.
We'll have to see on Monday and Tuesday whether they will go back to defending their peg. Unlike many foreign currency pegs, they should have the cash to defend their peg to the last dollar (with the exception of losses incurred due to SVB going under). However, it still might mean a huge loss of confidence in USDC. If they're unable to offer liquidity when people want it, that's potentially a big problem for the product they're offering (but it also might not be: maybe people don't care about 24/7 liquidity and are ok with waiting several days for liquidity).
What has changed is that third parties no longer have sufficient faith in that to extend the offer to 24/7. e.g. before Coinbase would give you USD for your USDC on Saturday morning because they were happy enough that they could take the USDC back to Circle and exchange into USD on Monday morning and that they had sufficient USD for the amount of people who were actually going to take them up on that.
Now because of either the worry about SVB contagion or the amount of withdrawals vs coinbase's usd reserves, coinbase is no longer willing to give you an advance on that action, and is making you wait until they can immediately exchange the usdc you give them for usd from circle. Coinbase was never the one under the obligation to give you USD for USDC anyway.
Obviously this is a little more complicated by Coinbase's 50% stake in Circle, but that's only relevant if a bankruptcy courts found misdeeds and a judge ruled Coinbase had to make up the shortfall due to said misdeeds, it's not a reason to be able to enforce Circle's liabilities on Coinbase as a day to day business matter.
https://www.circle.com/blog/an-update-on-usdc-and-silicon-va...
This logic applies to all bank deposits as well. SV Bank deposits were pegged to USD at a 1:1 ratio, they just broke the peg. People don't seem to realize USD bank deposits are not the same as USD. With "stable" coins it's more obvious because they have different names.
>As a regulated payment token, USDC will remain redeemable 1 for 1 with the U.S. Dollar.
How is pausing withdrawals not blatant currency manipulation? If I had USDC and lost all faith in it yesterday, shouldn’t I be allowed to cash out today?
Also, if they’ve got many billions in cash, why would losing access to a sliver of it justify shutting down withdrawals?
“Trust us, it’s worth a dollar! Or don’t trust us! It doesn’t matter because you don’t have any choice but to hold USDC until we deem it advantageous to us to allow you to exchange them for real money!”
This is basically what USDC is, and Circle is the organization that controls it. It is not a decentralized currency, it's a centralized digital currency. If Circle blacklists you and your funds, you won't be able to trade it for USD in the traditional exchanges, you'd only be able to do it P2P. This has happened already, with Tornado Cash, so it has precedent, not something I'm making up.
> USDC is issued and redeemed in accordance with Centre policies including the Centre Blacklisting Policy. Centre reserves the right to block the transfer of USDC to and from an address on chain as permitted under the Centre Blacklisting Policy.
https://www.circle.com/en/legal/usdc-terms & https://www.centre.io/hubfs/PDF/Centre_Blacklisting_Policy_2...
If Circle says you cannot exchange your USDC for USD, then that's the rule. If you don't want that possibility, you wouldn't use USDC in the first place.
It inherits from Blacklistable which allows a blacklister to blacklist accounts, and almost all functions on the contract have the notBlacklisted modifier which prevents them from being called by blacklisted accounts.
/**
* @title Blacklistable Token
* @dev Allows accounts to be blacklisted by a "blacklister" role
*/
contract Blacklistable is Ownable {
address public blacklister;
mapping(address => bool) internal blacklisted;
event Blacklisted(address indexed _account);
event UnBlacklisted(address indexed _account);
event BlacklisterChanged(address indexed newBlacklister);
/**
* @dev Throws if called by any account other than the blacklister
*/
modifier onlyBlacklister() {
require(
msg.sender == blacklister,
"Blacklistable: caller is not the blacklister"
);
_;
}
/**
* @dev Throws if argument account is blacklisted
* @param _account The address to check
*/
modifier notBlacklisted(address _account) {
require(
!blacklisted[_account],
"Blacklistable: account is blacklisted"
);
_;
}
/**
* @dev Checks if account is blacklisted
* @param _account The address to check
*/
function isBlacklisted(address _account) external view returns (bool) {
return blacklisted[_account];
}
/**
* @dev Adds account to blacklist
* @param _account The address to blacklist
*/
function blacklist(address _account) external onlyBlacklister {
blacklisted[_account] = true;
emit Blacklisted(_account);
}
/**
* @dev Removes account from blacklist
* @param _account The address to remove from the blacklist
*/
function unBlacklist(address _account) external onlyBlacklister {
blacklisted[_account] = false;
emit UnBlacklisted(_account);
}
function updateBlacklister(address _newBlacklister) external onlyOwner {
require(
_newBlacklister != address(0),
"Blacklistable: new blacklister is the zero address"
);
blacklister = _newBlacklister;
emit BlacklisterChanged(blacklister);
}
}Some risks arise mostly out of urgency, and not having countermeasures could have catastrophic results which otherwise would have been avoided by pausing the process. If Circle were operating as a fractional reserve bank where it borrowed from you by virtue of a positive bank balance, lent me 80% of that, and only kept 20%; pausing honouring withdrawals would likely be illegal.
My view of this is that it's unrealistic to expect a company to store 100% of its assets in immediately avaialable deposits whereas international regulations that apply to banks require ~30 days of liquid supply.
In this case, the legal contract between Circle and its depositors (holders of USDC) is that it'll exchange 1:1.
intrinsically, Circle seems to demonstrate that this contract isn't yet broken, but they can't continue to honour that agreement over a weekend when there's uncertainty of which avenue those funds will come from.
The selling pressure is purely from the secondary market where you're selling me USDC and I'm giving you 0.95 USD.
> Also, if they’ve got many billions in cash, why would losing access to a sliver of it justify shutting down withdrawals?
Because those billions are in T-bills that have to first be sold. And the "cash on hand" is ultimately with banks that are holding a fraction of it.
> “Trust us, it’s worth a dollar! Or don’t trust us! It doesn’t matter because you don’t have any choice but to hold USDC until we deem it advantageous to us to allow you to exchange them for real money!”
Well, "we're enabling redemption on Monday" doesn't equate to the above.
If my pastry shop runs out of already baked goods during the AM peak, I can only ask my customers to wait for me to finish baking more. If there was a pastry regulation, its review would say that I should start baking more pastries in future.
If your pastry shop had 40 billion donuts, and you claim that 10 billion of those donuts are available for sale immediately, do you close your shop when you lose 3.3 billion of them, leaving you with only 6.7 billion donuts that are still sitting there?
If you had 1 billion USD with your favorite US bank, that would be paused too right now.
It seems like they’re simply forcing people to hold USDC, full stop, and are blaming banks for their decision to do so.
If I move USDC from one wallet to another, and someone else moves bitcoin from one wallet to another in exchange for that USDC, that transaction happens entirely on the blockchain and at no point involves a bank or a peg.
The only reason to disable that function is to force people to hold USDC.
That would be the fault of Coinbase, not Circle or USDC. On other exchanges, like Bitstamp, you can freely buy/sell your USDC to crypto/fiat.
However, other exchanges actually do have USDC markets for most other cryptocurrencies. If you deposit your USDC with them, then you can directly trade order books on USDC/USD, BTC/USDC, and ETH/USDC, which function regardless of the lack of redemption and regardless of the actual market price of USDC.
If Coinbase had lots of USDC trading pairs like other exchanges do, it would avoid the issue you outlined in your comment, but it would also fragment liquidity across two markets that are effectively identical during business-as-usual periods where redemptions function properly.
"Trust us, you can withdraw your money! Or don't trust us! It doesn't matter because you have no choice but to look at your bank balance until we deem it advantageous to allow you to withdraw to real money!"
Seems like about 8% their assets will be locked up / at risk. For a company that promises to have 100% of assets backed up / readily accessible, I wouldn’t be surprised if this triggers a run.
Why do they keep saying this? This should’ve always been the case, regardless of SVB’s collapse. Seems more like a non sequitur to cover for an actual issue.
If SVB didn't crash, there wouldn't have been a huge spike in USDC redemptions, and Coinbase would have been able to service redemptions using their weekend reserves like they always have.
https://www.reddit.com/r/Bitcoin/comments/5ms1zc/after_being...
Was the app ever banned or everything proceeded as normal? Is Apple in Circle's pocket somehow?
Eg - https://twitter.com/TechEmails/status/1631352764247977985?s=...
If Apple were to ban Coinbase, many people would probably blame Apple for restricting access to their cryptocurrency rather than thank them for standing up for fair app store reviews. Instead, they've probably just asked them nicely to stop doing whatever would be ban-worthy otherwise, with a ban (and a press statement) ready in case they don't cooperate.
It wouldn't make business sense to ban a popular app for something as silly as fake reviews, especially with the amount of customer money involved.
I'm imagining a second thread on a different forum, nearly identical to the thread you linked and just as ideological, with a title like "After Circle was unfairly review-bombed with 1 Star reviews by haters, our community has added 55+ Five Star reviews in 3 days."
I don't get it..the money is gone. Is there something I am missing here? You cannot just magically fix a shortfall.
If it's not a security than it's not regulated.
USDC is backed 1 USDC for 1 USD. What you're actually seeing here is that the traditional finance system has lead to a crash in crypto. That's almost refreshing. Usually crypto fucks up by itself (see FTX and Terra for the most recent ones).
Also coindesk says TerraUSD is a stablecoin.
https://www.coindesk.com/price/terrausd/
Washington Post too:
https://www.washingtonpost.com/business/what-are-stablecoins...
Also Gemini says it as well:
The market reacts faster of course but the market has no crystal ball. It can't predict what's going to happen.
It’s at least 87¢ and 23¢ of priority unsecured claims on a bank in receivership.
They say they're 1:1 backed but have committed obvious financial fraud around this. There's no benefit to them to be even 95% backed, it's 100% or jail, so why would they bother?
This is how they maintain the peg perfectly - it's all fake. They "redeem" their friend's Tether with their personal funds but they won't even try if there's a run.
Says who?
I wonder how many startups would take a 2% - 15% cut to withdraw their money for short term expenses.
Is there a secondary market for deposits at banks? Like a Silicon Valley Bank Stable Coin (Probably would have been called a Silicon Valley Dollar before 1913)
That's just a truism, regardless of the stablecoin or the state that it's in. No-one should ever expect a $1 stablecoin to trade significantly higher than $1, since the creators of the coin can easily arb the difference to pocket some free money.
Tl:Dr: Save us, Big Government.
Their 10B in cash was spread over 6 banks to diversify the bank risk.
They have plenty of higher risk investments in their treasury, but these ones were the safe ones intentionally put into banks with insurance. If the government protection wasn't there the investment would’t have been there in the first place
That's standard practice.
Money from liquidation goes first to insured deposits, then what remains goes to uninsured deposits, then to pay other debts, and finally if anything is left, to shareholders.
Looks like here it will only cover insured deposits and substantial fraction of uninsured deposits.
I don't want to give Circle one cent of bailout money, though. And their post is saying that they are owed a full bailout because they participated in the bank run on the day of the bank run, and also begging for a full bailout. Pretty pathetic.
Where in this post does it say that?
> $3.3bn of USDC’s cash reserves remain with SVB. As of Thursday, we had initiated transfers of these funds to other banking partners. Though these transfers had not yet been settled as of close of business Friday, we remain confident in the FDIC’s management of the SVB situation and stand ready to receive these funds.
The part where they said that because they participated in the bank run that they should keep it all, presumably even if others who didn't participate in the bank run lose some of theirs:
> We have reason to believe that under applicable FDIC policy, transfers initiated prior to a bank entering receivership would have otherwise been processed normally. In other words, the FDIC should allow transactions to settle in the ordinary course through the end of a bank’s standard daily processing cycle until the FDIC takes control of the failed institution.
"transfers initiated prior to a bank entering receivership" is doing a lot of work here.
This is nonsense Treasury management. Fidelity spreads checking account deposits across twenty-six banks to reach $3mm FDIC coverage [1]. Beyond sweep, Circle’s assets should be in short-term, on-the-run Treasuries, repos and commercial paper.
[1] https://accountopening.fidelity.com/ftgw/aong/aongapp/fdicBa...
https://www.blackrock.com/cash/en-us/products/329365/
These funds appear to be specifically for short term redemptions, if they turn over 3B in redemption's every 7 days then how are they meant to keep less then that in the banks
IDK what that word means, in a financial context.
Can you get paid based on this "deserve"?
---
But in reality, no, no one will lose 100%.
Yes. Public company CFOs should not have this level of non-AAA counterparty risk concentration. (SVB were A1 and Baa1 [1] / A+ and BBB+ [2].)
[1] https://money.usnews.com/investing/news/articles/2023-03-10/...
[2] https://wolfstreet.com/credit-rating-scales-by-moodys-sp-and...
A couple MEV trackers on twitter are showing people making a shit ton of money through various onchain protocols goofing.
(this has nothing to do with the USDC redemption mechanism, nobody is doing that while banks are closed and Coinbase is disabled)