The big winners from the cryptocurrency crash? USDC Stablecoin

Things looked very shaky for cryptocurrencies in general and stablecoins in particular when Terra and its UST stablecoin collapsed last week along with the market-wide crash of cryptocurrencies.

But in terms of market cap and potential reputation, the crash has produced at least one winner: the USDC stablecoin.

AsUST heads towards zero, USDT (Tether) is processing billions of dollars in redemptions, and USDC is filling its market cap. At the start of the crash on May 8, USD Coin had a market cap of between $48 billion and $49 billion. After an almost imperceptible decline, it started rising on May 11 and is now at $52.26 billion, close to its all-time high of $53.6 billion set in March.

USDC has emerged from the crisis to become the fourth largest cryptocurrency by market capitalization and is closing the gap with Tether’s USDT, the top centralized stablecoin. Tether's market capitalization has fallen by more than $7 billion from its May 11 high of $83 billion.

Last week's troubles started not with the centralized stablecoinsUSDT or USDC, but with the algorithmic stablecoin UST. Centralized stablecoins promise to provide assets that are always equal to one dollar (or other fiat assets) by holding cash and (allegedly) highly liquid fiat assets as reserves, while algorithmic stablecoins such as Terra’s UST provide alternatives through decentralization. Commodities remain pegged to the U.S. dollar.

InTerra's case, holders of UST can exchange the stablecoin for $1 worth of LUNA (with some caveats). So, if UST somehow trades at $0.95, an arbitrageur can simply swap the token at the expected rate of $1.00.

But that peg brokeas Terra users questioned the usefulness of the network. They swapped UST for LUNA, then dropped LUNA. As the price of LUNA falls, traders can swap that token for UST. The result is that the circulating supply of an asset inflates as its value falls.

Early in the crisis, asTerra looked to secure outside funding to avert disaster, Treasury Secretary Janet Yellensingled outUST and called for stablecoin regulations that seemed likely to be pushed back to the fore given the growing risk of market contagion.

However, most of the draft legislation and potential regulations that have been proposed are specific toTether. The New York Attorney General's Officehas launched a two-year investigation into Tether for allegedlyfraudulently lending $750 million to its sister company, the cryptocurrency exchange Bitfinex . The investigation found that Tether's support is not what it seems. As the investigation began, Tether updated its wording in February 2019 to state that USDT reserves include “traditional currency and cash equivalents, and may from time to time include other assets and receivables from loans made by Tether to third parties, which may including affiliated entities."

AfterTether settled the lawsuit for $18.5 million, it began issuing assurance reports showing that most of its debt is commercial paper, a type of corporate debt that is usually liquid but vulnerable during financial crises.

Less than 10% of its $78.6 billion in assets are in cash, according to the latest report from an independent accounting firm onDec. 31. The bulk — $34.5 billion — was Treasury bills, and more than $24 billion was commercial paper and certificates of deposit; the remainder was money market funds, secured loans, corporate bonds, funds and precious metals, as well as investments in cryptocurrencies and other assets.

Tether's chief technology officer, Paolo Ardoino, said at a Twitter Spaces event last week that the company's commercial paper reserves had been halved and reallocated to U.S. Treasuries. He promised that proofs in the coming weeks would reflect that shift.

ButCircle got there on its own.

In August 2021, the Center Consortium, an organization founded by Circle and Coinbase to help manage USDC, announced that USDC would be backed only by cash and treasury bonds. The move comes after a July 2021 certification report showed it held more than a quarter of its reserves in commercial paper, certificates of deposit and corporate bonds.

However, Circle has never released a full audit report, and some critics say such certifications are not worth the paper they print on.

Still, Circle is allaying concerns about stablecoin redemptions. In a May 12 blog post titled “The Importance of Stability,” chief strategy officer Dante Disparte aligned USDC with regulatory efforts launched by Yellenwhen he convened the President’s Financial Markets Task Force and urged Congress to pass stablecoin legislation.

"If you want to reference the dollar and create price parity against buyer and consumer remorse," he wrote, "you actually need to hold high-quality liquid assets (in banking parlance) that are denominated in dollars and within a regulated banking system. HQLA).”

Furthermore, he is careful to point out that financial risk is not unique to algorithmic stablecoins, but rather can be found in stablecoins “with illiquid assets whose composition of collateral and reserves are too opaque to inspire confidence, or which are of questionable credit quality.” Too relevant for times of stress."

To some, this sounds likeTether.

UnlessCircle's other products gain the same momentum, USDC's gains may prove to be nothing more than an empty victory. After all, how does one make money holding dollars when inflation is over 8%?

Circle really wants to be more than just synonymous with USDC. It launched a venture fund in November and has payments products it hopes will be more valuable than the stablecoins they created to back them. A SPAC deal with Concord Acquisition Corp. in February valued the company at $9 billion, though pessimistic public investors may think that's too high.

Of all the stablecoins, USDC has the best chance of success right now. But as we saw last week, fortunes can change quickly — and the market can reverse.