There’s no business like the stablecoin business. People lend you money expecting nothing more than to get it back, one-for-one. All you have to do is place their money somewhere that generates interest greater than zero.
Circle, owner of USDC, the second-biggest stablecoin and the fifth-biggest cryptocurrency by market capitalisation, chose to deposit a lot of the money in Silicon Valley Bank. Oops.
Silicon Valley Bank is one of six banking partners Circle uses for managing the ~25% portion of USDC reserves held in cash. While we await clarity on how the FDIC receivership of SVB will impact its depositors, Circle & USDC continue to operate normally.https://t.co/NU82jnajjY
— Circle (@circle) March 10, 2023
And also . . .
2/ Like other customers and depositors who relied on SVB for banking services, Circle joins calls for continuity of this important bank in the U.S. economy and will follow guidance provided by state and Federal regulators.
— Circle (@circle) March 11, 2023
“A black swan failure”, according to Circle chief strategy officer Dante Disparte — yes, really — who was presumably consulted on the group’s strategy of harvesting interest on uninsured deposits at a specialist regional bank whose share price looked like this:
Ahead of a tilt for a stock market listing that ultimately failed, Circle said in August that deposits would be “exclusively backed by cash and short-term US government debt”.
But the big problem facing stablecoins is being able to give the money back on demand while earning enough in interest to pay operating costs, buy yachts, etc. Had Circle kept cash in a big vault it probably wouldn’t have been able to claim a $50bn valuation, whereas if it bought long-dated T-bills and whatnot, it would have been inviting a liquidity crisis.
Circle chose instead to outsource liquidity management to a subscale bank that put the money in long-dated T-bills and whatnot.
At pixel, awaiting news on whether bank regulators will indirectly bail Circle out, USDC is trading on the secondary market at 90 cents to the dollar:
Here’s what the community makes of it all:
A black swan is an unknowable unknown. A fractional reserve bank blowing up is the norm, and is certainly not a black swan 😂
— Robert ₿reedlove (@Breedlove22) March 11, 2023
😂
Further reading:— Amid crypto crash, Circle’s Jeremy Allaire may be the last person standing (Boston Globe, December 2022)— The financial bubble era comes full Circle (Rachet News, June 2022)
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