Chapter 1 : Market outlook
At the time of the report , the volume of tether in circulation amounted to $ 82.2bn . When compared to its $ 82.4bn consolidated total asset holdings , tether ’ s collateralisation exceeds the par value of stablecoins in circulation by less than 0.3 %.
As noted by economist Frances Coppola , if tether ’ s portfolio dropped “ even slightly ”, the value of the stablecoin would sink below parity and effectively force it to decouple from its $ 1 peg . This was exactly what happened during terra ’ s collapse on 12 May .
In light of all the talk of collateralisation and transparency , as bitcoin ’ s price tumbled by $ 10,000 between 4 May and 12 May , tether traded to a low of $ 0.956 and USDC traded at a premium of $ 1.01 , according to data from Glassnode .
Exchange flow data shows an inflow of tether coincided with a large outflow of USDC , signalling investors wished to sell tether and store USDC . This pushed tether ’ s price below par and pumped USDC above its $ 1 peg , a classical example of a flight to safety .
But is USDC really safe ? While tether ’ s transparency has been scrutinised , none of its stablecoin peers have fared much better .
Despite Fox-Geen claiming that “ we [ Circle and USDC ] are 100 % backed by US dollardenominated reserves ”, monthly audit reports from Circle on USDC only provide reserve account data and are frankly less transparent than tether ’ s attestations .
In a blog post published on 13
May , Fox-Geen wrote that USDC ’ s reserves consisted of $ 11.6bn in cash and $ 39bn in US Treasuries totalling $ 50.6bn , the same amount as USDC ’ s in circulation – making USDC ’ s portfolio more sensitive to volatility than tether .
Catch-22
If the most reputable stablecoins , collateralised with highly liquid and fiat-based assets cannot maintain their peg , there is little chance that decentralised ONCs and algorithmic stablecoins backed by cryptocurrencies and smart contracts will bring about stability .
If in doubt , turn stablecoin issuers into pseudo-banks and empower traditional banks to issue stablecoins . So echoes the sentiment of regulators in the US .
The Stablecoin TRUST Act of 2022 , presented to Congress in April , said stablecoins must be convertible into fiat by a centralised issuer 100 % backed by US dollars and high-quality liquid assets . This definition would only apply to OFC ’ s such as USDC , not tether .
The highlight of the Act includes a National Limited Payment Stablecoin Issuer ( NLPSI ) licence that would prohibit nonbank stablecoin issuers from lending or credit activities but would grant them access to a Federal Reserve master account . The second proposed Insured Depository Institution ( IDI ) licence would allow traditional banks to issue stablecoins .
Assuming Fox-Geen is correct when stating that Circle is “ 100 % backed ” by liquid dollar reserves , Circle could still not obtain the collateral needed to cater to the demand for USDC – so USDC depegged and traded at a premium .
A master account would
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