USDC stablecoin, the big ‘winner’ of the crypto collapse

The market capitalization of the USDC stablecoin has grown.
When Terra and its UST stablecoin crashed last week in tandem with a marketwide crypto meltdown, the outlook for crypto in general, and stablecoins in particular, looked bleak.

However, one victor emerged from the meltdown in terms of market cap and, presumably, reputation: the USDC stablecoin.

As UST approached zero and USDT (Tether) processed billions in redemptions, USDC increased its market cap. USD Coin had a market capitalization of between $48 billion(R769B) and $49 billion(R785B)at the outset of the crisis on May 8. After a nearly imperceptible decline, it began to rise on May 11 and is presently at $52.26 billion(R837B), close to its all-time high of $53.6 billion(R859B) established in March.

USDC, which emerged from the crisis as the fourth-largest cryptocurrency by market cap, is also closing the distance on Tether’s USDT, the top centralized stablecoin. Tether’s market cap has dropped by more than $7 billion since its peak of $83 billion on May 11.

Last week’s crisis began not with centralized stablecoins USDT or USDC, but with algorithmic stablecoin UST. Whereas centralized stablecoins promise an asset that is always equal to a dollar (or any fiat asset) by retaining cash and (allegedly) highly liquid fiat assets in reserve, algorithmic stablecoins such as Terra’s UST maintain their dollar peg through decentralized alternatives.

In Terra’s case, UST holders could exchange the stablecoin for a dollar’s worth of LUNA (with a few caveats). As a result, if UST was trading at $0.95(R15.23), arbitrageurs could simply swap the currency at its intended rate of $1.00(R16.03).

However, the peg snapped as Terra users questioned the network’s utility. They exchanged UST for LUNA, and then discarded the LUNA. As the value of LUNA fell, traders could exchange it for UST. As a result, the circulating supply of the assets increased as their valuations decreased.

Early in the crisis, when Terra was attempting to secure outside investment to escape disaster, Treasury Secretary Janet Yellen mentioned UST and asked for stablecoin laws, which appear to be resurrected given the growing risk of market contagion.

The majority of the proposed legislation and restrictions have been focused on Tether, which has been the subject of a two-year investigation by the New York Attorney General’s Office into an allegedly fraudulent $750 million(R12B) loan from Tether to its sister business, crypto exchange Bitfinex.

The investigation revealed that Tether’s support was not what it looked like. As the investigation kicked off, Tether modified its language in February 2019 to highlight that USDT reserves comprise of: 
“traditional currency and cash equivalents and, from time to time, may include other assets and receivable from loans made by Tether to third parties, which may include affiliated entities.”

Tether began posting assurance reports after settling the lawsuit for $18.5 million(R288M), indicating that much of its debt is in commercial paper, a type of corporate debt that is normally liquid but vulnerable during a financial crisis.

According to the most current report from an independent accounting firm, delivered on December 31, less than 10% of its $78.6 billion(R1.3TN) in holdings were in cash. The majority (34.5 billion) was in Treasury bills, with over $24 billion(R385B) in commercial paper and certificates of deposit; the remainder was in money market funds, secured loans, corporate bonds, funds and precious metals, and investments in crypto and other assets.

Tether’s CTO, Paolo Ardoino, announced last week at a Twitter Spaces event that the company’s commercial paper reserves have been slashed in half and transferred to US Treasuries. He pledged that an attestation would be issued in the coming weeks to reflect the change.

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