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Circle’s stablecoin banked at SVB and guess what happened next

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.

And also . . . 

A black swan failure” deserving of a government bailout, 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”.

A conundrum faced by stablecoin operators is to retain confidence in their ability to give money back on demand while still 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:


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)

Read the full article here

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