[PART 1] The Veracity of The USDC Crash Rumor On July 2022
USDC collapse is one of the rumours that is spreading very quickly and causing panic among the community. Is that true? Is the evidence for that rumour credible? Detailed analysis of the incident here!
In the past few days, a conspiracy theory has been circulating on social media that USDC is on the verge of collapse. Although it was just a rumour, it was released at a time when stablecoins were in trouble, so the news spread very quickly and its impact was significant.
And yet, USDC’s reserve fund is also accused of relating to funds in debt bubbles from stETH’s loss of peg or Three Arrows Capital’s default (e.g. Celsius, Alameda Research, BlockFi, ..). In addition, rumours have also hit the “gray area” of Circle, where Circle itself is also uncertain about the parties they lend to.
What is true about this rumour? Let’s go with Coincu to the root of the problem and verify the points of this conspiracy theory!
What Is USDC?
USDC is a stablecoin or stablecoin issued by Circle (USA). Circle is a global financial technology company specializing in peer-to-peer payments, licensed for digital currency services by the government agencies of two countries, the US (New York State Department of Financial Services) and the UK. in 2015 and 2016 respectively.
In addition, USDC is also backed by Coinbase, one of the crypto exchanges licensed in the US and aiming to be in the top 3 largest exchanges in the world.
USDC is always convertible into dollars of equivalent value to serve the need for a stablecoin for value transfer and peer-to-peer payment. USDC is created based on smart contract technology and is currently being deployed on many blockchains with different standards such as Ethereum (ERC-20), Avalanche (ARC-20), Algorand (ASA), Solana (SPL), Tron (TRC-20),…
The use of USDC is for payments, providing one-way liquidity on exchanges, collateral, trading, and more.
USDC Impressive Specs
As of June 29, 2022, USDC is currently the 2nd stablecoin after USDT and above BUSD.
In addition, USDC is also the coin with the top 4 capitalizations in the crypto market with $ 56 billion (according to Coingecko). Over 1.5 million USDC holders with coverage in over 190 countries (in terms of wallet addresses based on geolocation).
With extremely efficient and positive operation status compared to other Stablecoins on the market such as BUSD, USDT, TUSD. Why is USDC still in doubt?
Where Did the Rumor of USDC Collapse Come From?
Recently, on Twitter, information about USDC collapse has been spreading very quickly and the community’s scepticism has also been raised through the high social signal index.
The social signal index – which represents USDC’s social media awareness is at an all-time high (ATH) of 1.11k mentions on June 29, 2022 (according to LunarCrush).
So why does USDC attract such great public attention?
This stems from an account named Geralt Davidson who tweeted with the title “USDC on the verge of collapse?”. Quickly, this tweet was noticed by the community and people started pouring into this rumor.
In What Context Are Rumors About USDC Spread?
One of the events that shook the entire market in the second quarter of 2022 was about the loss of the peg of the algorithmic stablecoin UST with attractive interest rates to drag the whole market down.
The Default Bubble of Three Arrows Capital (3AC) and Others
After the collapse of UST, stETH lost its peg due to some problems related to profitability based on unsustainable debt and lenders facing the risk of collapse such as Celsius, BlockFi, 3AC. The last drop of water after the news about 3AC – a greedy and leveraged investment fund to amplify profits was exposed and had to declare bankruptcy.
More here: 3AC faces the risk of default
Is the information causing USDC FUD aimed at “overflowing murky water” after the previous series of stablecoins losing their pegs and debt bubbles?
After the successive peg losses of the UST, USDD, and the debt bubble burst, coincidentally the “unconfirmed” conspiracy theory about USDC contains arguments that are closely related to the above factors.
The tweeter makes the argument unfounded and it focuses on the point that is said to be in the “gray zone”, meaning that the factors are lacking clarity from Circle’s side.
Circle’s Gray Zone and Weakness Make Them Vulnerable to FUD
What is the information about the lenders that Circle’s treasury sends to Circle Bermuda for loans? And if this detail is not clear, others can exploit this point and harm USDC ⇒ Need more transparency on this matter.
However, the positive point is that institutional investors who want to join Circle Yield must be approved by Circle.
This will prevent the case that if Circle bears the risk of a part of the collateral (in the form of BTC) being liquidated, these investors will not request a mass withdrawal (because of commitments and withdrawal deadlines). pre-agreed based on the loan terms and deposit term of the original depositor).
⇒ Minimize the danger to Circle’s funds.
The “Conspiracy Theory” About the Fall of USDC
Case Details and Contacts with “High-risk” Lenders
The summary of the USDC FUD case and the claims made by the messenger are as follows:
(1): USDC has a major partner, Signature Bank of USDC Reserve. They will help Circle convert USD to USDC (Circle feature promises users that it will always be possible to exchange 1:1 between USDC and cash).
(2): Circle will have to pay a fee higher than the normal deposit fund interest rate to get this conversion to Signature Bank the estimated interest rate is ~5% (according to a confidential source) and it is larger when compared with the profit earned from lending.
⇒ Circle lost about 500 million USD (Q1 2022) and is forecast to lose another 1.5 billion USD for the whole year at the current loss acceleration.
⇒ The USDC total market cap cannot be implemented. In addition, he also informed that Circle to plan to pay this payment had to call for capital twice a year in previous years.
(3): USDC Reserve invests in Signet, Signature Bank and Silvergate provides 2 financial products, Signet and SEN. These are private platforms that connect with hedge funds and banks to move USD between parties.
Every dollar deposited in Signature bank will be converted into USDC and lent them out through Signet/SEN.
(4): Since Signature Bank and Silvergate are both banks, they can leverage their funds and fragment this reserve for various purposes. They are incentivized to lend USDC to earn profit to bring in revenue ⇒ Increase market cap ⇒ To allow printing of more USDC.
Circle also uses a non-U.S. company – Bermuda to provide a convenient facility for lending that is not subject to the control of US law.
(5): Subjects of the loans are said to be institutions such as Celsius, 3AC, BlockFi, Galaxy, and Alameda. They are said to hold large amounts of USDC and other lending facilities.
They are all high-risk borrowers and even default, insolvent, liquidated, or almost bankrupt like BlockFi. This lending platform was acquired by FTX for $25 million in order to save the project to help maintain operations.
(6): Circle’s lenders are all high-risk parties such as 3AC, Celsius, BlockFi and the risk that their USDC loans will not be repaid. Circle’s risk is when investors want to withdraw in bulk at the time of maturity.
⇒ Circle may not have enough USDC (because the parties lent by Circle are at risk) for investors to withdraw.
⇒ Likely to go bankrupt because their loans are not repaid.
The size of the loans is estimated to range from 3-5 billion USD.
In the first part, I walk through the USDC FUD in context, giving a few conspiracy theories. In the following sections, I will further analyze these negative theories, providing evidence on whether USDC is really at risk. (Part 2 | Part 3)
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