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There is no business like a stablecoin business. People lend money with the sole expectation of getting it back one-on-one. All you have to do is put their money somewhere that will earn you more than zero interest.
Circle, the owner of USDC, the second-largest stablecoin and fifth-largest cryptocurrency by market capitalization, has chosen to park a significant amount of its funds in a Silicon Valley bank. Oops.
Silicon Valley Bank is one of six banking partners that Circle uses to manage approximately 25% of its USDC reserves held in cash. While we await clarity on how SVB’s FDIC receivership will affect depositors, Circle and USDC continue to operate as usual. https://t.co/NU82jnajjY
— Circle (@circle) March 10, 2023
And then again. . .
2/ Like other customers and depositors who relied on SVB for banking services, Circle joins calls for the continuation of this important bank in the U.S. economy and follows guidance provided by state and federal regulators. .
— Circle (@circle) March 11, 2023
It’s a “black swan failure” that deserves a government bailout — yes, really — according to Dante Disparte, Circle’s chief strategy officer. He was probably consulted about the group’s strategy of earning interest on deposits. :
Ahead of an ultimately unsuccessful push for a stock market listing, Circle said in August that the deposit would be “backed solely by cash and short-term U.S. government debt.”
The challenge facing stablecoin operators is maintaining confidence that they can pay back the money on demand while earning enough interest to pay operating costs, buy yachts, etc. That probably wouldn’t have happened if the Circle had kept the cash in a large safe. The company can claim a $50 billion valuation, but if it had bought long-term government bonds, it would have created a liquidity crisis.
Circle instead chose to outsource liquidity management to smaller banks, which park their funds in long-term government bonds and other securities.
At Pixel, USDC is trading at 90 cents on the dollar on the secondary market as banking regulators await news on whether they will indirectly bail out Circle.
Here’s what the community has to say about all of this:
A black swan is an unknown entity that cannot be known. Fractional reserve bank explosions are commonplace and are by no means a black swan 😂
— Robert Breedlove (@Breedlove22) March 11, 2023
😂
Read more:
— Circle’s Jeremy Allaire may be the last man standing amid the crypto crash (Boston Globe, December 2022)
— The financial bubble era has come to an end (Rachet News, June 2022)
