[thebean11]

USDC claims to have the entirety of it in short term US treasuries. I don't know enough about banking to understanding whether the evidence in the article conflicts with that though.

> If you have any money left in crypto at this point, then you get what you deserve.

Yeah, I heard this in 2017 too. In reality neither of us knows how things will look a year from now. Short term will probably be ugly though.

[woeirua]

This kind of systemic risk did not exist in the crypto space in 2017. USDC didn't even exist yet, and USDT was a small player. The exchanges have always been the major risk factor for crypto (see: Mt. Gox and the other exchanges that have swallowed their customers crypto along the way), but it's not until the last few years that the fate of all the exchanges have been linked together. That's why this time is different.

[lupire]

Theft is bad, but it isn't an existential risk to the whole system. The value is still there, just moved.

Leverage is a different matter entirely, because "fractional reserve" style financing inflates the money supply. The monetary economy is like a juggling act. Increasing velocity makes it look more valuable, but when velocity slows down, the system becomes insolvent.

[thebean11]

Tether was not a small player in 2017, not sure if you remember but people were already sounding the alarm bells about it. Obviously it's bigger now, but so is the whole market.

Having USDC to compete with USDT puts things in a less risky position, not more. All evidence points to USDC being fully backed. The "bank run" scenario this article alludes to seems like a huge stretch.

[btilly]

You appear to not understand how banks work.

Yes, USDC is fully backed at the moment. Mostly by deposits in SBNY. However SBNY has most of its money lent out. Therefore the size of a run that USDC can survive is set by how much investments its banks, mostly SBNY has, which https://www.marketwatch.com/investing/stock/sbny/financials/... says is somewhat over $9 billion.

There is over $50 billion of USDC outstanding. So trying to redeem about 1/5 of it will result in a run on SBNY that SBNY can't handle.

Our financial system knows what to do with that situation. It is outlined in https://www.fdic.gov/consumers/banking/facts/payment.html. SBNY gets shut down, a new bank buys them, and depositors with accounts over $250,000 see their bank accounts reduced TO $250,000. USDC, as the largest of those depositors, would then no longer be backed.

So in the event of a crypto panic, about 80% of the money backing USDC is likely to go poof. Not because USDC did anything wrong, but because that is how banks work. It is not for nothing that banking has been described as "picking up pennies in front of a steamroller".

[thebean11]

> Our financial system knows what to do with that situation. It is outlined in https://www.fdic.gov/consumers/banking/facts/payment.html. SBNY gets shut down, a new bank buys them, and depositors with accounts over $250,000 see their bank accounts reduced TO $250,000. USDC, as the largest of those depositors, would then no longer be backed.

That is..not how it works. Are you assuming all of SBNY's loans are worthless / bad debt? If SBNY folded the loans would get sold to pay back the creditors. They wouldn't get the full value obviously, but those loans don't just magically disappear. They'd certainly get more than the 20 cents on the dollar you are claiming..

Even your own link covers this..

> If for example, a depositor has only a single account with a balance of $255,000, he or she would be paid $250,000 through FDIC insurance and would receive a claim against the estate of the closed bank for the remaining $5,000 which is not insured. The depositor would be given a Receiver's Certificate as proof of this claim and would receive payments as the assets of the bank are liquidated.

Someone being so confidently and condescendingly wrong is peak hackernews.

[FabHK]

The bond market is almighty [1], and given that daily volume seems to be around $bn 500 or 600 [2], it seems that it would not be too hard for USDC to unload $bn 50 of treasuries in a fairly short time (despite worries about bond market liquidity [3]).

However, as the article points out, if USDC gave most of the money to a bank (SBNY), then it is not obvious that the bank put it in short term treasuries - the bank could have done the usual thing of putting it into longer term loans ("maturity transformation"). Given that USDC constitutes nearly half of that bank's balance sheet, but cash/cash equivalents less than a third, things could get interesting on the way down.

[1] > In the 1990s, the Democratic political adviser James Carville said: “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.” https://www.bloomberg.com/news/articles/2018-01-29/the-daily...

[2] see eg. https://www.finra.org/filing-reporting/trace/data/trace-trea... (click on a recent weekly report) or https://www.statista.com/statistics/189302/trading-volume-of...

[3] see eg. https://www.bloomberg.com/news/articles/2022-05-24/treasurie... (Note: also a running gag in Matt Levine's Money Stuff column...)

[dragontamer]

Short term treasuries still take time to change into US Dollars. A bank run could make USDC insolvent in the short term, in theory.

That's why you have FDIC insurance to cover the time period between say, a 30 day treasury and the worst case bank run.

That being said, such an event hasn't really happened in decades. So it's relatively low chance of happening.

[thebean11]

> That's why you have FDIC insurance to cover the time period between say, a 30 day treasury and the worst case bank run.

Well, usually banks use your money for much riskier loans (business loans, personal loans, mortgages) which is why you need FDIC. Not because treasuries take too long to sell.

The volume on US treasuries is like half a trillion a day, so it shouldn't take very long to liquidate even large amounts of USDC's holdings..

[wolongong942]

Even worse is that a lot of these stablecoins have their funds deposited with Silvergate, a niche crypto bank that makes its money by lending to people like Michael Saylor. Their stock is down about 50% over a few months.

[dragontamer]

> The volume on US treasuries is like half a trillion a day, so it shouldn't take very long to liquidate even large amounts of USDC's holdings..

US Treasuries are down like 10% this year.

Yes, a bank can liquidate, but at a loss, a 10% loss in this case. The bank would rather hold-onto maturity, which could be 30-days or 90-days for some of the shorter bonds.

[thebean11]

Short term US treasuries specifically. They are pretty insensitive to interest rate changes since they are close to maturity.

[dragontamer]

6-month US Treasuries were 0.36% APY on January 19th, 2022.

1-month US Treasuries are 1.13% APY today, June 14th, 2022.

-----------

So if you had bought a 6-month US Treasury on Jan 19th, you'd have a 1-month Treasury with .36% APY.

That's worth much much less than the current 1-month US Treasuries that are available, so you'd be forced to sell at a loss if customers requested their money back.

[thebean11]

> That's worth much much less than the current 1-month US Treasuries that are available

It's not 10% less, or anywhere close to it. You are only missing out on roughly (1/12) * (0.0113 - 0.0036) * (treasury amount) vs a 1 month treasury bought today..I'm having trouble finding a price chart for 1 month treasuries.

6-month is obviously more sensitive to the rate drop than 1 month, but the 10% number you are referencing is almost certainly for long term treasuries, not short term..

[gizmo686]

Short term liquidity problems are handled by the repo market, where banks can take short term loans from other banks to cover withdrawals. In a crisis situation the lender of last resort (e.g. central bank. So federal reserve for USD) will step in and make the loans.

The FDIC is designed to cover solvency issues, not liquidity ones. It does not kick in until afterva bank has failed.

[conanbatt]

Treasuries are one of the most liquid assets in the world. The question is if they could crash in value while simultaneously maintaining the dollar value, that could break a peg.

[thebean11]

Since they are short term the dollar amount wouldn't change much, even with big swings in interest rates. USDC is also tied to the dollar value (not inflation or interest rate adjusted) so I don't see how this could happen

[FabHK]

FDIC covers individual investors up to a quarter million or so, if I'm not mistaken, not institutional investors that have deposited $bn 50.

[lupire]

FDIC is for when the money is gone, not frozen. FDIC protection means you get paid back when the dust settles, not immediately.