Crypto’s on-ramp sunk into SVB’s brick wall

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Stablecoins aren’t living up to their billing, yet again. After last year’s Terra explosion, bouts of market tension at Tether, and a regulatory crackdown on Binance’s BUSD, now Circle’s USDC – one of the most stable stablecoins – is scrambling to calm down panic over his exposure to the now defunct Silicon Valley Bank, where he had $3.3 billion in reserves. Even if it succeeds, regulators and banks have plenty of reasons to be on their toes.

As the name suggests, the job of a stablecoin is to behave in the crypto markets like a digital dollar without actually being one. The benefits for traders are low volatility for tokens operating outside the rules of traditional finance and providing access to slick new forms of crypto lending. The risks are myriad: losses to investors if the dollar peg breaks, crime, including money laundering, and financial instability given the size of the $136 billion market and its growing interconnections. with TradFi.

USDC’s daredevil weekend highlights another reason regulators need to remain vigilant. Unlike Terra, USDC is a stablecoin with support based on cash and dollar assets. The risk for investors is either that these reserves do not exist as advertised, or that a counterparty goes bankrupt, which is exactly what happened. Just months after a CNBC appearance in which Circle co-founder Jeremy Allaire bragged that digital dollars were superior to bank deposits because of the “risks” banks take with people’s money. , a real bank run on Silicon Valley Bank effectively sparked a parallel bank run on USDC, which at one point fell below 85 cents. Coinbase Global Inc. has halted USDC dollar conversions.

An optimist might argue that, provided Circle’s revelations are accurate, this looks like a survivable crisis. The $3.3 billion trapped in SVB represents a small slice of Circle’s overall reserves of $42.1 billion, of which $32.4 billion is invested in Treasury bills and $9.7 billion in cash . Allaire said that if SVB does not repay 100% of its deposits, Circle will cover any shortfall using “corporate resources” or external funds if necessary. This has stemmed most of the panic selling and has even caused some crypto evangelists to brag that SVB’s ‘TradFi’ collapse only serves to show DeFi’s resilience.

That’s fine in theory. But in practice, this sounds like a very optimistic interpretation. Market pressure on USDC highlights what Kaiko analyst Conor Ryder has called the “stablecoin trilemma.” The trade-off for achieving the stability of reserve-backed tokens is for investors to trust the reliability and profitability of a centralized entity. At least some of that confidence was gone for a while, if not for good. Given how quickly the selling pressure hit USDC, the size of the stablecoin market, and the fact that investors depend on sometimes spotty disclosure – all details of Circle’s banking relationships have not yet been revealed. not disclosed so far – this will likely prompt regulators to push to drag stablecoins into the light.

Additionally, the events of the past week should see fewer banks, and no more, wanting to partner with stable sponsors. Counterparty risk, concentration risk, regulatory risk and now interest rate risk will lead banks to become more selective vis-à-vis their customers. In just a few days, we saw the demise of Silvergate Capital Corp. – which was exposed to the collapse of the FTX exchange and had acquired Diem from Facebook in hopes of issuing its own stablecoin – and SVB. In December, Signature Bank openly stated that it would be more demanding in allocating capital to crypto, including stablecoins. Why would bulge-bracket banks think differently?

So there is perhaps some twisted logic in the fact that an opaque stablecoin like Tether – which has been much more cautious and deceptive about where its reserves are held – has been a big beneficiary of the problems of the world. USDC over the weekend, trading at a premium. Since this market does not have a JPMorganCoin or central bank digital currency, there is no real flight-to-quality option beyond cashing out. The hinterland between TradFi and DeFi already looked like no man’s land – the events of the past weekend will only bring more financial barbed wire. For good reason.

More from Bloomberg Opinion:

• The Threat of Central Bank Crypto Dreams: Marcus Ashworth

• Crash Course: Cryptocurrencies Vs. Reality: Timothy L. O’Brien

• Matt Levine’s Money Stuff: SEC Coming for Crypto Custody

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Lionel Laurent is a Bloomberg Opinion columnist covering digital currencies, the European Union and France. Previously, he was a reporter for Reuters and Forbes.

More stories like this are available at bloomberg.com/opinion

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