How USDC Works - Is It Really Without Risk?

Stablecoins have become a USD 150 billion market and a point of concern for regulators. As of now, Bitcoin (BTC) price is about $21k, and the total crypto market cap is about USD 950 billion. Therefore, USD stablecoins are currently about 16% of the total crypto market cap.

We all know what happened with Terra's UST, and what could happen with Tron's USDD. There are also now some doubts about Tether (USDT), which lost its peg for a few hours. Everyone seems to agree that USDC is the most reliable stablecoin. Is it really safe?

What are the risks of USDC?

USDC had an audit in December 2020, which confirmed they had USD 4 billion ($) for the 4 billion USDC emitted. Since then, USDC grew by USD 50 billion...

USDC largely banks at two places: Silvergate Bank (SI) and Signature Bank of NY (SBNY). USDC has largely banked at SBNY during their 2021 growth. Therefore, The main problem with USDC is that USDC largely banks with SBNY, and a large fraction of SBNY’s liabilities are specifically to USDC.

Furthermore, SBNY acts as a normal bank, i.e., they lend out a large portion of this money...

Therefore, according to one of the articles written on this topic (reference below), the main risk is the bank run risk:Stablecoins have become a USD 150 billion market and a point of concern for regulators. As of now, Bitcoin (BTC) price is about $21k, and the total crypto market cap is about USD 950 billion. Therefore, USD stablecoins are currently about 16% of the total crypto market cap.

We all know what happened with Terra's UST, and what could happen with Tron's USDD. There are also now some doubts about Tether (USDT), which lost its peg for a few hours. Everyone seems to agree that USDC is the most reliable stablecoin. Is it really safe?

What are the risks of USDC?

USDC had an audit in December 2020, which confirmed they had USD 4 billion ($) for the 4 billion USDC emitted. Since then, USDC grew by USD 50 billion...

USDC largely banks at two places: Silvergate Bank (SI) and Signature Bank of NY (SBNY). USDC has largely banked at SBNY during their 2021 growth. Therefore, The main problem with USDC is that USDC largely banks with SBNY, and a large fraction of SBNY’s liabilities are specifically to USDC.

Furthermore, SBNY acts as a normal bank, i.e., they lend out a large portion of this money...

Therefore, according to one of the articles written on this topic (reference below), the main risk is the bank run risk:
In normal times, this wouldn’t be a problem: individual depositors at a bank are insured by FDIC to prevent bank runs. But in USDC’s setup, there’s only one individual depositor (USDC) and all of their depositors have a claim against USDC, not the bank SBNY. This is a problem – if there’s a bank run on USDC, USDC promises instant redemptions. But these redemptions immediately become a bank run on SBNY, who have most of that money lent out!

Individual USDC holders probably won’t qualify for FDIC “passthrough insurance” in the case of a USDC->SBNY bank run contagion. So USDC, while doing most things roughly correctly, are still subject to significant bank run risks compared to a traditional bank.In normal times, this wouldn’t be a problem: individual depositors at a bank are insured by FDIC to prevent bank runs. But in USDC’s setup, there’s only one individual depositor (USDC) and all of their depositors have a claim against USDC, not the bank SBNY. This is a problem – if there’s a bank run on USDC, USDC promises instant redemptions. But these redemptions immediately become a bank run on SBNY, who have most of that money lent out!

Individual USDC holders probably won’t qualify for FDIC “passthrough insurance” in the case of a USDC->SBNY bank run contagion. So USDC, while doing most things roughly correctly, are still subject to significant bank run risks compared to a traditional bank.
And so what?

If you believe in crypto, it will make more sense in the long term to invest in a real coin such as Ethereum (ETH) - please DYOR, it is not a financial advice.

If you do not believe in crypto, why will you keep USDC in your portfolio rather than real USD or EUR? If it is for the interest rates you can earn on USD, a trusted financial advisor will tell you that any investment offering an interest rate (APY) above 2% is risky, especially if it is done with a stablecoin.

If you really want to use a stablecoin to temporarily keep the value of your assets before investing again in a new bull run, you may look at alternative otpions like the BUSD of which the interests can be reinvested into the Binance Coin (BNB) in order to get cashback rewards by using their debit card.