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Is the depegging of the USDC stablecoin a result of bad governance?

Updated: May 24, 2023

USDC issuer Circle held $3.3 billion (approximately 8 percent of its reserve) at Silicon Valley Bank (SVB). Following the collapse of SVB last week, the USDC stablecoin depegged, begging the question of whether this results from poor governance on Circle’s part. We believe it is not.

The collapse of SVB comes as a shock to global financial markets. SVB was among the 20 largest U.S. banks and had more than $170 billion in deposits at the end of 2022 (according to its 10-K form). It is the second-largest bank failure in U.S. history. With Circle's announcement on Saturday that its $3.3 billion could not be retrieved from SVB before the Federal Deposit Insurance Corporation (FDIC) took control of the bank, SVB's collapse has also affected the crypto market.

Intuitively, it makes sense that Circle had a close banking relationship with SVB. Aside from being one of the largest financial institutions in the US, SVB also had particularly close ties to the innovation and startup sector, including cryptocurrency. In addition, SVB was considered very safe and held a good A1 credit rating for local currency deposits, according to Moody's.

What we know from the last reserve report

From a governance perspective, Circle discloses its banking relationships in its regular reserve report, which is audited by Deloitte, one of the world's most recognized audit companies.

In its most recent reserves report, dated Jan. 31, and audited on March 2 of this year, Circle states that approximately 23 percent ($9.8 billion) of its $43.5 billion in reserves were held in cash with US-regulated financial institutions. In it, Circle clarifies that said cash was deposited at only seven different U.S. banks, SVB being one of them. It was among the largest institutions on the list by far, along with the Bank of New York Mellon and Citizens Trust Bank. It is therefore not surprising that Circle held an amount of $3.3 billion at SVB.

A look at the reserve report reveals that Circle only holds U.S. government bonds with a maturity of fewer than three months and cash in regulated U.S. banks. Hence, this investment strategy has been designed to be safe and to have a minimal risk to depeg from the US dollar. Typically, Circle's investment strategy is assumed to be safer than the investments in commercial paper that money market funds usually do. That said, the only real risk with Circle's investment strategy is the failure of either the U.S. government or one of its seven depository banks. For this risk to occur with the collapse of the SVB was extremely unlikely and has only happened twice in U.S. history on this scale.

Counterparty risk and diversification

From a governance perspective, Circle properly disclosed its relationship with SVB, noting that it holds very large cash positions with a relatively small number of U.S. banks. Furthermore, the investment strategy of its reserve assets was professional and transparent. Thus, Circle has fulfilled the necessary governance requirements in terms of the investment of its reserve assets and its public disclosure.

However, the SVB collapse will certainly trigger more questions about stablecoins and how they should invest their reserve. The case shows how crucial counterparty risk can be and how important it is to diversify cash holdings.

No ESG rating change for USDC

Green Crypto Research gave USDC Stablecoin an A- score in all three ESG dimensions, resulting in the best possible overall rating of A. When USDC briefly lost its peg to the U.S. dollar last Saturday following the bankruptcy of SVB, GCR analyzed whether it was triggered by poor governance practices. As our research indicates, we do not believe this to be the case.

USDC has above-average governance compared to other stablecoins, a good reputation, communicates transparently, regularly publishes its reserves, and has an audit from one of the most respected auditors. Therefore, the rating will not be adjusted for the time being. Nevertheless, we continue to keep a close eye on the governance assessment of Stabelcoins against the backdrop of possible regulations by the U.S. Congress.

Our rating approach

Overall, we source up to 110 data points per coin to feed our quantitative estimation models. We also apply qualitative expert judgment to ensure that soft factors such as visions, roadmaps, or conflicts of interest are taken into account and included in the rating.

Our rating system is relative, i.e. we evaluate the sustainability of each coin or token in direct comparison to its peers. In other words, we ask ourselves which cryptocurrency is more sustainable considering a similar market cap and transaction volume. This is to ensure that those with higher transaction volumes and associated higher CO2 emissions are not automatically penalized.

Learn more about our methodology.

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