Will USD Coin (USDC) Collapse?

USD Coin’s (USDC) problems are exposing the lie behind stablecoins. The lie is that stablecoins contain fiat currencies such as dollars.

For example, many people think US Dollars back USD Coin. In reality, stablecoins contain a payment mechanism (a smart contract) that makes payment in fiat currency when you spend the stablecoin. For instance, USD Coin makes payment in US dollars from bank accounts when spent.

Thus, stablecoins can become worthless if the smart contract cannot make a payment. Crytpo journalists call this fear losing the peg. The peg is the stablecoin’s ability to make fiat currency payments. Fears that could happen can destroy USD Coin.

How Silicon Valley Bank’s Collapse can Destroy USD Coin

To explain, Circle, USD Coin’s owner, kept $3.3 billion of its cash reserves in Silicon Valley Bank. Silicon Valley Bank collapsed on 10 March 2023.

Frighteningly, news reports allege many Silicon Valley Bank accounts are uninsured. For example, Roku (ROKU) admits 26% of its cash is in uninsured Silicon Valley accounts, Endgadget reports.

The California Department of Financial Protection closed Silicon Valley Bank and appointed the FDIC as receiver of its assets on 12 March 2022. Speculators feared Circle could not cover USD Coin payments because of the Silicon Valley Bank collapse. Endgadget claims USD Coin’s price fell to 87₵ on 10 March 2023.

Normally, the FDIC only insures $250,000 in bank accounts. However, the Biden administration announced the U.S. Treasury Departmen,t and the Federal Reserve, will backstop all Silicon Valley Bank deposits regardless of any amount, The Washington Post reports. Extraordinarily, they made the announcement late on Sunday 12 March 2023.

Hence, depositors, such as Circle, had access to all their money on 13 March 2023. Thus, Circle has access to all the money it needs to make USD Coin (USDC) payments.

A bank collapse threatens USD Coin because stablecoins resemble checking accounts. To explain, checks bounce if the checking account does not contain enough money to cover them. Similarly, stablecoins can bounce if the account has no money. Or if a bank blocks access to the account.

Is USD Coin (USDC) Collapsing?

I think rumors of USD Coin’s demise are exaggerated. To explain, Circle claims it collateralizes USD Coin with $32.4 billion in US Treasury Bills and $9.7 billion in cash.

Treasury Bills (T-Bills) are short-term US federal government debt obligations the US Treasury Department backs. Financial analysts consider T-Bills and treasury bond some of the safest investments on the planet. They consider T-Bills safe because the federal government can always increase taxes or print more money to pay them.

Moreover, Circle cut USD Coin’s bank risk by depositing $5.4 billion with BNY Mellon (NYSE: BK), a press release claims. The Bank of New York Mellon Corporation (BK) is one of America’s oldest and largest financial services company. BNY Mellon had $405.783 billion in total assets and $148.06 billion in cash and short-term investments on 31 December 2022.

Hence, USD Coin will keep paying $1 USD for each USDC. Circle can cover the USD Coin payments because it has the money.

What Value does USD Coin Offer?

A USD Coin (USDC) collapse is scary because CoinMarketCap estimates USD Coin was the fifth largest cryptocurrency on 13 March 2023. However, data shows USD Coin is retaining value.

CoinMarketCap gave USD Coin a 99.7₵ Coin Price, a $40.380 billion Market Capitalization, a $40.338 billion Fully Diluted Market Cap, and a $11.449 billion 24-Hour Market Volume on 13 March 2023. CoinMarketCap had a $5.538 billion Centralized Exchange (CEX) Volume and a $5.857 billion Decentralized Exchange (DEX) Volume on 13 March 2023. They base those numbers on a 40.513 billion USDC Circulating Supply.

Circle reports $43.4 billion worth of USD Coin was in circulation on 9 March 2023. They backed that USDC with $43.5 billion in reserves. They estimate Circle issued $3.3 billion in USDC and redeemed $3 billion in USDC in the seven days ending on 9 March 2023.

In comparison, Circle issued $18.6 billion in USDC and redeemed $17 billion worth of USDC in the 30 days ending on 9 March 2023. Hence, the amount of USDC in circulating grew by $1.6 billion in the 30 days ending on 9 March 2023.

Conversely, the amount of USDC in circulation fell by -$9.08 billion in the 365 days ending on 9 March 2023. Circle issued $185.6 billion worth of USDC and redeemed $194.6 billion worth of USDC in that period.

Is USD Coin a Good Stablecoin?

I think USD Coin (USDC) is still a strong stablecoin because it had $43.5 billion in reserves on 9 March 2023.

Thus, I think USD Coin shows stablecoins can be strong and viable financial instruments if the organizations backing them have enormous amounts of cash. Therefore, the amount of cash the organization issuing the stablecoin has determines the stablecoin’s value.

My suspicion is that stablecoins are here to stay. I suspect strong stablecoins such as USD Coin will survive as long as their issuers have lots of cash. In the world of stablecoins, cash is still king.