USDC depeg will hinder stablecoins’ development, enhance regulatory scrutiny — Moody’s

by Jeremy

Latest turmoil within the conventional banking sector, culminating in USD Coin (USDC) dropping its peg, may negatively have an effect on stablecoin adoption and probably enhance requires regulation, argued credit standing company Moody’s Traders Service. 

In its newest “Sector Remark” report revealed on March 16, Moody’s says fiat-backed stablecoins may face new resistance following USDC’s depegging on March 10.

“Till now, giant fiat-backed stablecoins had proven outstanding resilience, having emerged unscathed from previous scandals such because the collapse of FTX,” wrote analysts Cristiano Ventricelli, Vincent Gusdorf, Rajeev Bamra and Fabian Astic. “Nevertheless, current occasions have proven that the reliance of stablecoin issuers on a comparatively small set of off-chain monetary establishments limits their stability.”

The sudden collapse of Silicon Valley Financial institution on March 10 was a major threat occasion for USDC issuer Circle Web Monetary, which had $3.3 billion in belongings tied up within the financial institution. Over the span of three days, Circle cleared roughly $3 billion in USDC redemptions as the worth of its stablecoin plunged to a low of round $0.87.

By finish of U.S. banking operations on March 15, Circle had “cleared considerably all the backlog of minting and redemption requests for USDC,” the corporate mentioned.

USDC shortly regained its peg after the Federal Deposit Insurance coverage Company introduced that it might backstop all deposits held at Silicon Valley Financial institution. Circle CEO Jeremy Allaire instructed Bloomberg on March 14 that his agency may now absolutely entry its $3.3 billion reserves.

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Though calls to control stablecoins have grown louder following the collapse of Terra, fiat-backed stablecoins just like the one issued by Circle function otherwise than Terra’s algorithmic token that failed in Could 2022. Nonetheless, Moody’s believes that regulators are more likely to pursue extra stringent oversight of the sector shifting ahead.

The credit standing company mentioned that USDC was capable of regain its peg solely as soon as U.S. regulators determined to repay Silicon Valley Financial institution’s unsecured deposits. “In any other case, USDC may have suffered from a run and been pressured to liquidate its belongings,” Moody’s analysts mentioned, including:

“Given the present market volatility, such a state of affairs may, in flip, have precipitated extra runs on banks holding Circle’s belongings, which may have led to the depegging of different stablecoins.”