Is USDC Safe? & Why Did It Depeg?

Why Did USDC Depeg_ Is it Safe Now_

Discover why USDC depegged and whether it's safe now. Get the answers you need to make informed decisions.

  • In March 2023, USDC experienced a significant depegging event due to its exposure to the collapsed Silicon Valley Bank, raising concerns about its stability

  • However, it quickly regained its peg to the US dollar after a few days, demonstrating its resilience

  • The future of USDC involves potential regulatory developments, increased adoption in various sectors, integration with traditional finance, and continued efforts to maintain stability

In this article, we’ll guide you through the factors that led to USDC depegging and explore the stablecoin’s current status so that you can make informed decisions.

What Is USD Coin (USDC)?

USD Coin is a stablecoin designed to maintain a 1:1 peg to the value of the US dollar. It operates on various blockchains, including Ethereum, Algorand, Solana, and Stellar. It is recognized for its transparency and regulatory compliance. 

It is issued by the Centre Consortium, a collaboration between Circle and Coinbase, which manages the cash reserves of US dollars backing USDC and ensures regulatory compliance.

Learn more about USDC here.

Is USDC Safe?

USDC is considered safe due to several factors:

  • Every USDC token in circulation is fully backed by an equivalent amount of US dollars held in reserve. Regular third-party attestations verify the adequacy of these reserves
  • USDC adheres to anti-money laundering and know-your-customer procedures to ensure legitimate transactions. It complies with relevant regulations, enhancing its safety
  • Robust security measures protect USDC against hacks and cyberattacks, employing industry-standard encryption and protocols

Read about earning interest on USDC.

Why Did USDC Depeg?

A depeg occurs when a stablecoin, designed to maintain a fixed value relative to a fiat currency like the US dollar, deviates in value from that intended peg.

A few factors combined to cause USDC to depeg in March 2023.

Silicon Valley Bank’s Collapse

In March 2023, Silicon Valley Bank (SVB) faced a deposit run. USDC's stability was challenged when it was revealed that Circle, the issuer of USDC, had substantial exposure to SVB, amounting to billions of dollars. Nearly 8% of USD coin's $40 billion in reserves were tied up at the collapsed bank.

USDC's Exposure to SVB

The revelation that Circle had up to $3.3 billion in exposure to SVB sent shockwaves through the cryptocurrency market. This exposure raised concerns about the stability of USDC, as it became clear that the stablecoin's value was tied to the fate of SVB.

Depreciation of USDC

As the news of USDC's exposure to SVB spread, USDC's value started to depreciate rapidly. It fell below 90 cents following the announcement of Circle's exposure, indicating a loss of confidence in the stablecoin's ability to maintain its 1:1 peg with the US dollar.

What Happened to The Silicon Valley Bank?

Silicon Valley Bank (SVB)’s collapse in March 2023 and the subsequent seizure of its deposits was one of the largest banking failures in the United States since the 2008 financial crisis. 

It had a significant impact not only on SVB but also on the financial institutions and entities with which SVB had business relationships. 

In particular, it had implications for USD coin, a stablecoin whose issuer, Circle, had a substantial portion of its reserves tied up at SVB, contributing to USDC's temporary loss of its dollar peg. 

The collapse of SVB illustrated the vulnerability of financial institutions, even those operating in the technology and innovation hub of Silicon Valley, to sudden financial crises.

Here’s how it all went wrong for SVB.

The crisis began when it unexpectedly announced that it needed to raise $2.25 billion to strengthen its balance sheet. This announcement came as a surprise to investors and the financial community.

This news led to a significant reaction from investors. Concerns about the bank's financial health and stability led to a loss of confidence.

In response to the uncertainty surrounding SVB, customers of the bank began withdrawing their deposits on a massive scale. According to a California regulatory filing, SVB customers withdrew a staggering $42 billion of deposits.

As customers continued to withdraw funds, SVB's financial situation deteriorated rapidly. By the close of business on a specific day, SVB had a negative cash balance of $958 million.

Due to the severity of the situation, regulatory authorities took action. Regulators closed SVB and seized its deposits, effectively shutting the bank.

The Impacts of USDC Depeg

The depeg had both immediate and wider impacts. 

The Immediate Impacts of The USDC Depeg

Circle, the issuer of USD coin, responded to the crisis by onboarding new banking partners to reduce concentration risk. This move was aimed at strengthening USDC's stability and resilience.

The depegging had a ripple effect on other stablecoins, including BUSD (issued by Paxos) and DAI (issued by MakerDAO). These stablecoins also lost their pegs to varying degrees, creating a broader sense of instability in the stablecoin market.

The Wider Impacts of The USDC Depeg

The depegging events raised concerns among regulators about the stability and governance of stablecoins. It highlighted the impact of financial crises in the traditional banking sector on stablecoins like USDC and the importance of maintaining sufficient reserves to back these digital assets.

Regulators began to consider additional requirements for stablecoin issuers, including enhanced liquidity and transparency standards.

How Long Did It Take For USDC To Repeg?

Three days after it deviated from its intended value following the closure of SVB, USDC regained its dollar peg.

Here's a breakdown of what happened.

USDC lost its dollar peg on Friday after news broke about Circle's exposure to SVB. This news led to a lack of confidence in USDC, causing its value to trade below a dollar.

Over the weekend, while the bank was closed and U.S. policymakers determined what to do with SVB’s assets, USDC continued to trade below a dollar, indicating that it had deviated from its peg. During this period, USDC's value was significantly below $1.

On Sunday night, regulators approved plans to backstop depositors and financial institutions associated with SVB.  On Monday, USDC began to regain its value and return to the intended peg of $1. This happened on Tuesday.

Will USDC Depeg Again?

Predicting whether or not USDC will depeg again in the future is difficult, as it depends on a variety of factors, including market dynamics, regulatory developments, and the actions taken by the issuer, Circle, to safeguard the stability of USDC.

Here are some factors to consider:

Market Conditions

Stablecoins like USDC are designed to maintain a relatively stable value, so significant depegging events are rare.

Reserve Management

Circle, as the issuer of USDC, plays a crucial role in managing the reserves that back the stablecoin. To prevent depegging, Circle may take measures to ensure that it holds sufficient assets in reserve to support the value of USDC. The company has already made adjustments to its reserve strategy in response to the SVB crisis.

Regulatory Environment

Regulatory changes and actions by government authorities can also affect the stability of stablecoins. If regulators impose new rules or restrictions on stablecoin issuers, it could impact the operations and value of USDC.

Issuer Actions

Circle has a vested interest in maintaining the peg of USD coin to the US dollar. The company may take proactive steps to address any potential threats to the stability of USDC, such as diversifying its reserve holdings or working with reputable financial institutions.

Market Demand

The demand for USDC and other stablecoins can fluctuate based on various factors, including their use in decentralized finance (DeFi) applications, trading, and remittances. Strong and stable demand can help maintain the peg.

Could USDC Ever Go To Zero?

The prospect of a stablecoin like USDC, which is designed to maintain a 1:1 peg with the US dollar, becoming completely worthless is unlikely. 

Here are  a few reasons why.

Inherent Stability

USDC's primary objective is to provide stability. It achieves this by being backed by actual US dollar reserves, which means that for every USDC token in circulation, there is an equivalent amount of US dollars held in reserve. This intrinsic stability is a strong safeguard against the value of USD coin plummeting to zero.

Reserve Backing

The backing of USDC by real US dollar reserves serves as a direct and tangible link between the value of the stablecoin and the US dollar. This means that even in extreme market conditions, the reserve-backed nature of USDC provides a solid foundation that prevents it from becoming worthless.

Market Confidence

USDC has gained significant trust and adoption within the cryptocurrency community and beyond. Its widespread use as a medium of exchange and store of value further reinforces market confidence in its stability and utility.

Transparency and Attestations

USDC issuers undergo regular attestations conducted by reputable accounting firms. These attestations serve to verify that the number of USDC tokens in circulation matches the quantity of US dollar reserves held. The transparency and accountability offered by these attestation reports bolster the confidence of users.

Regulatory Compliance

USDC issuers operate in compliance with regulatory standards and collaborate with financial authorities to ensure adherence to legal requirements. This regulatory system contributes to the stability and legitimacy of USD coin.

Redemption Mechanism

In many cases, users can redeem their USDC tokens for US dollars at a 1:1 ratio. This redemption option provides an additional layer of security, as it allows users to convert their USDC holdings back into US dollars if they ever have concerns about the stablecoin's value.

How Does USDC Maintain Its Peg?

The cornerstone of USDC's stability is its backing by real US dollar reserves. For every USDC token in circulation, there is an equivalent amount of US dollars held in reserve. This 1:1 backing creates a direct link between the value of USD coin and the US dollar.

Transparency is key to maintaining trust. USDC issuers regularly undergo attestations to verify that their reserve holdings match the number of USDC tokens in circulation. These attestations are conducted by reputable accounting firms and provide an extra layer of assurance to users.

USDC issuers adhere to regulatory standards. They work closely with financial authorities to ensure compliance with laws and regulations. This regulatory system helps mitigate risks and adds to USDC's stability.

USDC users can often redeem their tokens for US dollars at a 1:1 ratio. This redemption mechanism acts as a safety net, as users can convert their USDC holdings back into US dollars if needed.

The crypto market itself plays a role in stabilizing USDC. Traders and investors monitor USDC's price relative to the US dollar. If USDC starts deviating from its peg, market forces come into play to bring it back in line.

USDC benefits from widespread adoption and high liquidity across various cryptocurrency exchanges. This liquidity ensures that users can easily buy or sell USDC tokens at or near the intended peg value.

Issuers of USDC and other stablecoins continuously monitor market conditions and make adjustments as needed to maintain stability. This proactive approach helps prevent major deviations from the peg.

What Does The Future Look Like For USDC?

USDC has been growing in popularity as a stablecoin due to its transparency, regulatory compliance, and multi-chain interoperability. As cryptocurrencies become more mainstream, USDC is likely to see increased adoption in various sectors, including decentralized finance (DeFi), online commerce, remittances, and more. 

USDC's stable value and transparency make it an attractive asset for bridging the gap between traditional finance and the cryptocurrency ecosystem. Integration with traditional financial institutions, payment providers, and banking services could expand its use cases.

At the same time, stablecoins have come under increased regulatory scrutiny in various jurisdictions, including the United States. The future of USDC may be influenced by regulatory developments and how regulators classify and oversee stablecoins. 

Conclusion

The USDC depegging event raised important questions about the stability of stablecoins and their reliance on traditional financial institutions. USD coin passed this stress test with flying colors, demonstrating it is one of the most reliable USD stablecoin options. 

Ledn’s new USDC Growth Account is the benchmark in how to generate yield on your stablecoins. They currently offer 8.50% APY on USDC, a competitive yet realistic rate. 

Related Content: How Ledn generates yield on its USD Stablecoin accounts

These accounts are designed to fund Ledn’s retail loan book. As a result, your stablecoin deposits are fully collateralized with Bitcoin posted by borrowers, making it a secure way to earn yield on USD stablecoins.

Via Ledn’s Monthly Open Book Report, you can see the collateralization levels and how they use stablecoin deposits. You can also check out their Proof of Reserves attestations every six months.

You can opt-in and out of yield by moving deposits between interest-earning Growth Accounts and non-interest-earning Transaction Accounts whenever you want.

All of Ledn's Growth Accounts are ring-fenced, which means you are only exposed to the counterparties that generate your yield. In the unlikely event of a Ledn bankruptcy, your Growth Account will not be affected.

 

Sponsored by 21 Technologies Inc. and its affiliates (“Ledn”). All reviews and opinions expressed are based on my personal views. Please read Ledn’s full Risk Disclosure Statement and Disclaimers.