It's hard for USDC to crash, so there's no need to panic

Author: 0xLoki

I. Analyzing the Risk of Collapse from Circle's Reserve Asset Structure

1/n Reserve assets can be divided into three parts: (1) $32.4 billion in government bonds (2) $3.3 billion in SVB (3) $7.8 billion in banks other than SVB.

The first part is the government bond portfolio, which as of January this year consists of 16 securities, all with investment durations not exceeding 3 months, providing ample liquidity, and even if forced to discount, there would not be significant losses.

2/n It is important to note that the information disclosed on the official website is only up to January, and among these, nine securities have already matured, totaling over $18 billion. We cannot be 100% certain whether Circle has continued to purchase short-term government bonds, but from external information, it appears that Circle will continue to buy government bonds after maturity, ensuring that the maturity dates are distributed within the next 1-3 months. This is clearly a very prudent approach, and the probability of issues arising with the $32.4 billion government bond portfolio is extremely low.

3/n More importantly, the situation with SVB is completely different from FTX; SVB's own mismanagement led to its bankruptcy, which is not necessarily related to these loans. Most of the loans are still recoverable, and a 43% loss is an extremely extreme scenario with a very low probability of occurrence.

4/n The third part is the $7.8 billion outside of SVB. We also found relevant information disclosure on the official website, indicating that all of Circle's cash is held in seven banks, including SVB and Silvergate.

While we cannot be 100% certain about the safety of other banks at this time, we can glean some information from stock data, which shows that, aside from SVB and Silvergate, three other banks, including Signature Bank, also do not inspire confidence.

II. USDC Extreme Value at 0.885, Normal at 0.985

5/n According to previous public information, Circle detected the risks associated with Silvergate at the end of 2022 and ceased interactions with it, so the risk exposure to Silvergate Bank can be considered zero.

6/n Additionally, considering that BNYM is Circle's preferred bank, theoretically, the allocated amount is larger. Conservatively estimating that BNYM accounts for 35%, with the remaining four banks each at 10%, the risk lies with three banks, with risk = 111*30% = $3.3 billion and $3.3 billion in SVB. In a pessimistic scenario where all three face issues, assuming an 80% recovery rate, Circle's total loss would be approximately $2 billion.

7/n A more reasonable estimate is that Circle loses $3.3 billion * 20% + $1.1 billion (from one of the three banks) * 10% = approximately $700 million. The most extreme scenario would be that the $3.3 billion in SVB and $5 billion from the remaining three banks are unrecoverable, but the probability of this estimate occurring is too low.

8/n Therefore, the benchmark USDC net values are: 0.985 (normal), 0.954 (pessimistic), 0.885 (extreme).

9/n In the 2022 financing round, Circle's valuation reached $9 billion, with a quarterly net income of about $43 million. A loss of $700 million to $2 billion is not too significant for Circle.

Circle has no subjective faults or malicious actions in this matter and remains a quality enterprise. Even if losses occur and Circle cannot resolve them, it is highly likely that other institutions would be willing to acquire or invest to solve the problem.

III. Conditions for USDC to Truly Collapse

10/ For USDC to truly collapse, three conditions must be met:

(1) There is a sufficient amount of funds in SVB and the three medium-risk banks.

(2) The debt recovery rate of these banks is sufficiently low.

(3) USDC itself cannot bear the losses or find a funding supporter to resolve the issue.

Therefore, my personal view is that the probability of issues arising is low, and even if problems do occur, they will not be as severe as FTX.

11/ As a side note, the model of USDC will not immediately face issues even if bad debts are unresolved, as long as there is enough USDC in circulation rather than being redeemed. In the most extreme case, $6 billion would only be 11%. Meanwhile, Venus has a TVL of $1.13 billion, with $147.5 million in chain debts and $52 million in bad debts, totaling nearly 20%, yet it has survived for a year without any issues.

12/ The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.

The above is not investment advice.