USDC is a fiat-backed stablecoin; this means that under each token in circulation somewhere in a safe place there must be one real dollar (in the form of a security or cash in a bank).
On March 10, it suddenly became clear that for about 7% of the USDC reserves in the bank is bankrupt. Panicked, they began to massively drain their USDC reserves - which led to a depeg (decoupling of quotes from $1) by about 10-12%.
Depeg (decoupling of quotes from $1) by about 10-12%
The collapse of the USDC occurred exactly on the weekend, after the closure of banks in the United States. Pegging to the dollar for any fiat stablecoin is ensured primarily by the uninterrupted exchange of tokens for real dollars - after all, in the event of a deposit, arbitrageurs have an incentive to massively buy USDC at 90 cents, and immediately exchange them for a full dollar from the treasury of Circle (USDC issuer), extracting instant profit. So, this mechanism just does not work on weekends - since banks are closed and it is technically impossible to transfer dollars in exchange for a token.
After the banks opened on Monday, the USDC peg to the dollar was restored, and at the moment the quotes fluctuate close to $0.999 per token (the promise of American regulators to reimburse all deposits to depositors also played an important role here). So, if you did not make sudden movements on the weekend, then you should not have suffered much.
Price at the time of publication of the article.
Let's see what lies in the USDC reserves at the moment. It must be said that over the past year, the transparency of this stablecoin has grown significantly: the monthly reserve report now reveals their detailed structure - down to the breakdown by specific bonds; and the Circle website provides weekly updates on reserve changes. Moreover, Circle also publishes its full audited financial statements annually, which is a rarity among stablecoin issuers.
According to the latest data, as of March 11, 2023, 77% of USDC reserves were in ultra-reliable US government debt (US Treasury Bills) with a maturity of no more than a year, and the remaining 23% lay as cash in accounts in seven American banks. Three went out of business last week (fortunately, their contributors were not affected). I hope Circle made the right conclusions and from now on they will try to store their cash in top reliable banks.
The highest level of transparency.
77% of the reserves are in the most reliable assets (US Treasuries), which also bring a yield of ~5% per annum, which has a positive effect on the issuer's potential to close a hole in the balance sheet due to the yield received.
In a crisis situation, Circle voiced an unambiguous and correct message: "if necessary, any shortage will be covered by us using internal resources and attracting capital."
Prior to the events of this month, USDC looked like the most likely candidate for cooperation with various mainstream financial giants.
Serious questions have appeared to Circle. For example, what criteria are used to select banks? Perhaps you need to choose the top 3 American banks.
-The situation with more than 10% depeg (albeit short-lived) from now on, of course, will tarnish the reputation of the USDC in the eyes of the general public. In the business of instilling a sense of stability in others, there are doubts about this very stability - this in itself is dangerous.
Do not forget that the USDC code has a built-in ability to block any wallet address at the behest. Considering that the Circle issuer is registered in the USA.
Despite the failure of the banks, USDC is still by all accounts the most reliable stablecoin available.