The American banking crisis, from the collapse of Silvergate to Silicon Valley Bank, reveals how heavily regulated, dollar-backed stablecoins like USDCUSDC aren’t as stable as crypto advocates suggest.
In contrast, perhaps because TetherUSDT doesn’t rely on dollars held in American banks, Tether’s more controversial stablecoin USDT, has remained closer to its dollar peg over the weekend. Although it too fell several cents below the dollar value. Overall, it was the notoriously volatile bitcoin that proved to be a better hedge against the Silicon Valley banking crisis, with price dips and increases continuing in the typically chaotic pattern regardless of news from the Federal Deposit Insurance Corporation.
USDC, which was originally issued via a partnership between Circle and the crypto exchange Coinbase, quickly regained the dollar peg after Circle issued a statement that dollar redemptions will continue despite reserves held in the now-collapsed SVBVB. Circle also banks with the Bank of New York MellonBK, and the FDIC’s intervention to guarantee SVB customers’ deposits both contributed to USDC’s quick recovery. Ironically, it appears the dollar-pegged stablecoin is as reliant on banks and government action as fiat predecessors.
USDC Vs. USDT
Stepping back, USDC and USDT are a duopoly of centralized stablecoins. They both play a major role in the crypto economy.
What makes users choose USDC or USDT is a matter of availability, liquidity, reliability and perceived trust. USDT is more popular in Asia, while USDC is popular in North America, where Coinbase often guarantees redemptions. Although managed very differently and often serving different use cases, they are two sides of the same coin: Centralized Crypto-Dollar IOUs.
Early adopters of bitcoin saw stablecoins as a mere trading tool, a temporary trading quote currency. But today they are at the center of most DeFi products and traditional crypto exchanges, also called CeFi. Centralized stablecoins help centralized exchanges like Binance or Crypto.com offer convenient crypto on/off ramps for international users, regardless of whether they have US bank accounts. As such, this makes them the majority holders of stablecoins, according to Etherscan.
However, ever since a combination of unfortunate events in 2022 led to the collapse of the algorithmic stablecoin TerraLUNA3, regulatory crackdowns and banking catastrophes have exposed the crypto industry’s central players to be dangerously overleveraged.
Crypto Can’t Rely On Banks And Stay Stable
After this disaster, a seemingly coordinated attack by American lawmakers, dubbed “chokepoint 2.0” by crypto advocates, is systematically debanking the cryptocurrency industry. In March 2023 alone the crypto industry lost three of the biggest banking service providers, Signature Bank, SVB, and Silvergate.
The few banks who dare to dip their toes in Web3 are being scrutinized and advised against serving the crypto industry. Compliant players and their banking partners are subject to continuous regulatory pressure, while trail-blazers that rely on regulatory arbitrage don’t offer a scalable nor sustainable option either. The most successful stablecoins today are simply not good enough to reach the market value of an industrialized nation’s fiat currency. For comparison, the current market capitalization of USDC is greater than the annual gross domestic product of Bhutan. But, likewise, the tiny nation of Bhutan needs to peg the value of its own currency, Ngultrum, to the value of India’s currency to remain (relatively) stable. The value of stablecoins, similarly, relies completely on third parties, banks, and lawmakers today.
If any cryptocurrency, beyond bitcoin, is ever to offer users the ability to hedge against dollar instability, it will need to decouple from fiat currency almost entirely. There are already algorithmic stablecoins and crypto-backed stablecoins that only use bitcoin and/or ether to mint and redeem stablecoins on demand for any currency (not just USD). If the crypto ecosystem is to become resilient to Silicon Valley’s banking crisis, then crypto companies may need to start bootstrapping liquidity with native solutions.
In the short term, stablecoins like USDC are not actually any more stable than the banking services that enable them. If, in contrast, crypto exchanges were to turn to crypto-native solutions rather than merely seeking out new banking providers after the collapse of Silvergate, Signature, and SVB, then traditionally regulated exchanges would have a unique opportunity to increase transparency, create new standards for proof of reserves, and perhaps draw closer to delivering on the promise of a decentralized economy.
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