USDC, or USD Coin, is a stablecoin that is pegged to the US dollar at a 1:1 ratio. This means that for every USDC token in circulation, there should be a corresponding USD held in reserve to back it up. The purpose of this peg is to provide stability to the value of USDC, allowing it to be used as a reliable means of exchange and a store of value. However, in recent months, there have been concerns about the stability of this peg, with some market participants raising questions about whether USDC is truly backed 1:1 by US dollars.
The first signs of trouble appeared in November 2021, when Circle, the company behind USDC, announced that it was changing its reserve policy. Previously, Circle had claimed that USDC was backed 100% by US dollars held in reserve, but it now stated that USDC would be backed by a combination of cash and short-term US government bonds. While Circle argued that this change would provide greater flexibility and yield for USDC holders, some in the market saw it as a sign that Circle was struggling to maintain its 1:1 peg to the US dollar.
In December 2021, these concerns were further exacerbated when it was reported that Circle had issued a large amount of USDC without having the corresponding US dollars in reserve. According to a report by CoinDesk, Circle had used a network of shadow banks to borrow dollars against its USDC holdings, effectively creating USDC out of thin air. While Circle denied these allegations and insisted that its reserve holdings were fully audited and transparent, the damage had been done, and many in the market began to question the integrity of USDC's peg.
The situation came to a head in February 2022, when a sudden surge in demand for USDC caused the stablecoin to temporarily depeg from the US dollar. On February 21, USDC briefly traded at a premium to the US dollar, with one USDC token being worth $1.02. While this may seem like a small deviation, it was a significant event in the world of stablecoin, where even minor deviations from the peg can have major repercussions.
In response to this de-pegging event, Circle and its partner company Coinbase issued a joint statement reassuring the market that USDC was still fully backed by US dollars and that the de-pegging was a temporary anomaly caused by market forces. However, the incident has left many in the market with lingering doubts about USDC's stability and has sparked renewed calls for greater transparency and oversight in the stablecoin market.
However, on March 11, 2023, USDC depeg again from the US dollar dropping to a low of $0.877 per coin with some other stablecoin after Circle Financial announced that $3.3 billion of the cash-backing USD coin (USDC) was held at Silicon Valley Bank (SVB). Earlier on March 9, Circle initiated a wire transfer to remove its funds from SVB as the Federal Deposit Insurance Corporation-insured bank was about to shut operations.
Following the de-pegging of USDC, several major crypto exchanges, including Binance and Coinbase, have suspended USDC trades.
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