The US Federal reserve has been locked in a relentless duel against inflation that can be traced back to the pandemic – when the economy, and all of life itself, ground to an abrupt halt. As millions lost their jobs, and businesses faced the mother of unprecedented waters, the economy plunged into a deep recession.
When the world opened up, and in the face of supply chain and production issues, people started spending again. Demand increased, supply couldn’t do much to match up, and as you would expect, prices climbed.
In a delayed response to the resulting inflation that came in March 2022, The US Federal Reserve raised interest rates slightly. However, since then,interest rates have gone up 7 more times in a bid to curb inflation.
The federal funds rate (the only interest rate that the central bank controls) is what banks use to lend money to each other overnight and it went up from nearly zero to 5 percent in the space of a year –the fastest spike on record.
SVB Suffers from Rising Interest Rates
The Silicon Valley Bank found itself in an unfortunate position – between a rock and a hard place if you will.
- The Rock – The Tech industry’s stock suffered a huge blow in 2022, falling by 30%(10% more than the overall market drop at 20%)
- The Hard Place – Spikes in the federal funds rate.
Moreso, SVB’s profile as a haven for startups and venture capitalists added a layer of complexity to an already difficult situation.
Summarily: Startups and VC funds needed more and more cash to fight the market, forcing SVB to sell typically safe bonds at a loss (in light of increased Federal funds rate). This made the bank’s customers uneasy, culminating in a bank run on March 10, 2023.
The rest, as they say, is history.
The Stablecoin Fall-Out
Despite the volatility of cryptocurrencies, Stablecoins came to the scene to offer an alternative to their highly volatile contemporaries. These coins aim to achieve stability by having their value pegged to another currency or commodity.
There are 3 main types of stablecoins:
- Fiat-Collaterized
- Crypto-collateralized, and
- Algorithmic stablecoins.
For this article, we’re focusing on the first group, fiat-collateralized stable coins, you can read more about stablecoins here.
Fiat-Collaterized stablecoins, as the name suggests, are stablecoins pegged against fiat currencies. Usually, these coins maintain fiat reserves to assure the stablecoin’s value.
Often, these reserves are maintained by a third party and audited periodically.
According to Coinmarketcap, the top 3 Stablecoins by market capitalization (USDT, USDC, and BUSD) are all fiat-backed.
The USD Coin (temporary) De-peg
As of January 17, 2023, the second most popular stablecoin by market capitalization, USDC was known to have a percentage of its reserves held at the struggling SVB. Circle, USDC’s issuer, also held a fraction of the stablecoin’s reserves in another struggling institution, Silver gate bank – although it has since announced that the fraction of its USDC reserves held there were moved to its other banking partners.
During the SVB debacle, Circle shared that about 8.2% ($ 3.3 Billion) of its total reserves were held at the fledging bank, this of course caused some panic and resulted in a temporary de-peg, causing the coin’s value to fall to 88 cents.
On that same day, Coinbase announced that it would be halting USDC transactions temporarily.
Since then, however, USDC has managed to recover, as Circle continues to assure customers that all is well (or will be). On March 15, the company announced that they have ..cleared substantially all of the backlog of minting and redemption requests for USDC and ..redeemed $3.8 billion USDC, and minted $0.8 billion USDC.
HackerNoon Poll: Trust for Stablecoins
All appears to be well in the Circle universe, but trust is nearly as volatile as cryptocurrency itself and users continue to have their reservations.
InHackerNoon’s weekly polls, for the week of 03/13/23 – 03/29/23, we asked the HN community of 4M+ monthly readers what stablecoins they trust.
HN Polls Result
No surprise that a clear majority (38%) of users lean towards Tether (USDT). Perhaps owing to the fact that the coin seemed completely unaffected by the SVB implosion – according to the announcement on Twitter by Tether CTO, Parlo Adroino.
- USDC came a not-so-close second, with 22% of users standing by the stablecoin.
- DAI came third with 14% of users entrusting their fate to the DAO-governed stablecoin.
- 11% of users trust BUSD and a final 11% keep their trust in a range of other stablecoins.
You can access the full breakdownhere.
Final Thoughts
As the market goes down a recovery path (hopefully), USDC’s de-peg has highlighted a flaw with the existing fiat-based stablecoin design – a sentiment that CZ, CEO of Binance shares according to his tweet on Mar 12, 2023.
The future of cryptocurrency is, as always, uncertain and incredibly exciting. And major events like these- while detrimental in the now, always seem to help move the ecosystem in the right direction.
This article was originally published by Asher on Hackernoon.
