The dollar stablecoin by Coinbase and Circle, USDc, is no longer backed by actual dollars but by volatile treasury bonds.
This year, U.S. Treasuries have had their worst start in history, and that may mean big losses for USDc.
“As of 12:00pm EST Friday, May 13, 2022, the USDC reserve consisted of $11.6 billion cash (22.9%), $39.0 billion U.S. Treasuries (77.1%), for a total of $50.6 billion (100%), and there were 50.6 billion USDC in circulation,” Circle’s CFO Jeremy Fox-Geen said.
He further clarified that most USDc reserves are in “short-dated U.S. government obligations, consisting of U.S. Treasuries with maturities of 3 months or less.”
Those treasuries have crashed in bond terms. Some half a trillion was whipped out in just a week earlier this month. Yields are up and up, and so the value of these bonds is down and down with the discount price for 3 months Treasuries up from zero last year to now 0.95%.
To understand what that means, you have to 0.95*90/360, giving us a whooping 23% discount.
It’s a crash, and bonds have seen one of the biggest panic in markets, with USDc thus probably losing about $4 billion, or 10%, over the past 12 months due to their investment in Treasuries.
That’s the lower end, if they just held they may have lost as much as $8 billion, with BlackRock managing all this so we don’t know how precisely they performed.
That’s because instead of just holding, they may have traded them, but that moves into gambling territory as you can lose, as well as win, from trading.
Tether’s USDt does the same in holding Treasuries, but they at least also hold bitcoin, which 10xed at some point since 2018.
Treasuries are never going to 10x, except for down, so any losses would be difficult to recoup through just patience.
The other alternative is of course something like DAI. This is a more than fully collateralized smart contract based stable coin with a system that has proven itself since 2017.
They give you interest for holding dai, with that interest coming from borrowers of dai. They also make dais available on dapps like Compound, where the dai lender can’t lose as the borrower is overcollateralized, and certainly can’t lose to the same extent USDc can lose by lending to the deeply indebted US government.
Which means, the only stable in the end may well be a crypto stable. The rest will sooner or later go fractional reserve due to their losses, and maybe even bankrupt, though not in the traditional sense.
Because the default here will be subtle and not even noticeable as fractional reserves do sort of work in as far as the end users get a 90% devaluation without even being aware.
Such devaluation may go to the greater pool of USD itself, making it really unnoticeable due to the supply of USDc or t being somewhat negligible compared to the total dollar supply, especially for M4.
Thus through these two and other similar stables we get in crypto a direct integration of the USD block production, which sooner or later will probably be formalized with Fed bank accounts.
Not least because with $40 billion in Treasuries and just for USDc, it is more the Fed’s business and the government’s business just what happens to USDc, rather than cryptos.
So even if there are any losses, it’s irrelevant where cryptos are concerned because they don’t hold any cryptos, certainly not to the same extent as treasuries.
But where holders are concerned they get all the risk without any upside because neither USDc or USDt passes on any profits they might make in better years.
While actual stables like DAI are decentralized open finance, and that means you get the profits too while loses are limited to the individual and his or her management or mismanagement of the collateral.
