Multi-party discussion: Will USDC crash? Who will become the white knight?

On March 11, Circle disclosed that 3.3 billion USDC reserve assets were locked in the bankrupt Silicon Valley Bank, which caused a huge shock in the industry. USDC fell below 0.88 USD. Coinbase urgently closed the fiat currency exchange channel and promised to open it when the bank opened on Monday. On the morning of the 12th, as Circle stated that it would support USDC and use company resources to make up for any shortfalls, involving external capital when necessary, the price of USDC also rebounded to more than 0.96 USD.

There is a lot of discussion about whether USDC will crash. We have selected the following.

Sacred fish:

There are two key points. The first is that there are 3 billion USDC collateralized to mint DAI in the on-chain MKR. Once liquidation is triggered, there will be heavy losses. The second is that the bank will open for withdrawals on Monday, and we need to pay attention to the bank run. Binance currently holds more than 3 billion USDC, and we need to pay attention to the dynamics of exchanges and market makers.

PS: MakerDAO has initiated an emergency proposal for USDC to limit Maker's exposure to potentially damaged stablecoins and other risky collateral, while maintaining sufficient liquidity to prevent DAI from trading significantly above $1 when circumstances change, and ensuring sufficient market liquidity to handle potential liquidations of cryptocurrency collateral vaults.

https://forum.makerdao.com/t/emergency-proposal-risk-and-governance-parameter-changes-11-march-2023/20125

0xLoki, Researcher at Xinhuo Technology

USDC reserve assets can be divided into three parts: (1) $32.4 billion in Treasury bonds (2) $3.3 billion in SVB (3) $7.8 billion in banks other than SVB. As of January this year, there are 16 securities with an investment period of no more than 3 months, which provide sufficient liquidity. If the pessimistic recovery rate is calculated as 80%, then Circle's total loss is 33*40%+33*20%=about $2 billion. A more reasonable estimate is that Circle lost 33*20%+11 (one of the three)*10%=about $700 million in SVB. The most extreme case is that SVB's 3.3 billion and the remaining three companies' 33*50%, a total of 5 billion, cannot be recovered. The net value of the benchmark USDC is: 0.985 (normal situation), 0.954 (pessimistic situation), and 0.885 (extreme situation). Circle has no subjective fault or evil behavior in this matter and is still a high-quality company. Even if losses actually occur and Circle cannot solve it on its own, there is a high probability that other institutions will be willing to acquire or invest to solve the problem.

For USDC to really go bankrupt, three conditions must be met: (1) SVB and the three medium-risk banks have sufficient funds (2) the debt recovery rate of these banks is low enough (3) USDC itself cannot bear the losses or cannot find financial support to solve the problem. So my personal opinion is that the probability of problems is low, and even if there are problems, they will not be as serious as FTX.

Read the original article:

https://twitter.com/Loki_Zeng/status/1634410350505508864

Hal Press, founder of hedge fund North Rock Digital

Circle holds 77% of its reserves in 1-4 month T-bills. These T-bills are held by BNY Mellon and managed by BlackRock. This provides an absolute floor of 0.77 for USDC. Even if we assume that every bank they hold cash in fails, in the worst case, USDC is still worth 0.93 USD. I think it is likely that USDC will eventually fully re-peg. I bought more USDC at 0.88 USD. Already bought some USDC earlier at 0.935 USD. Citadel/Blackrock can step in and do equity financing to support liquidity, and then they can reopen next week.

Muse Labs Jiang Jinze

USDC seems to be salvageable at the moment. After all, the short-term debt investment of more than 30 billion yuan (no floating loss, and even the net value of bonds has risen sharply recently, exceeding 1) can be sold to provide enough liquidity. However, they have to bet on a strategy: whether to suspend payment and use the money from selling investment products for secondary repurchase. Or to open payment, but only at 0.91. I personally think the first option is better, because it essentially allows people who sell USDC at a discount to bear the debt loophole. The second option forces everyone to share the deficit, and the stablecoin will be useless.