Thursday, September 7, 2023

Circle says its USDC stablecoin was as diversified as possible. Is that accurate?

There's a good article by on stablecoin issuer Circle, which provides some clarity into last March's big depegging of the USDC stablecoin, and Circle's subsequent bailout by the government.

I wrote about the whole thing here, but the short version is that a handful of banks collapsed earlier this year, one of which was Silicon Valley Bank (SVB). Circle kept $3.3 billion at SVB, almost all of which was uninsured, which amounted to 8% of the assets keeping USDC stablecoins pegged to $1. When news of SVB's collapse hit on Friday, March 10, a weekend run began on Circle, the price of USDC collapsing to below 90 cents.

Luckily for Circle, it would get a bailout. That weekend, the FDIC announced that the $250,000 limit on government deposit insurance would be waived for SVB. Circle's $3.3 billion was saved. As SVB's biggest depositor, Circle was the single largest beneficiary of the bailout.

According to the article, Circle has "no remorse" over its decision to hold $3.3B at SVB. It was "as diversified as possible" and blames banking for its woes, which is "extremely difficult" for crypto firms.

I just don't buy this argument.

Circle's stablecoin competitor, Paxos, didn't have single-bank exposure. As the screenshot below shows, $185.5 million worth of deposits held to back Paxos's USDP stablecoin were spread over thousands of banks using deposit placement networks like IntraFi, and were thus insured by the government. For the remainder, Paxos obtained $72 million worth private insurance. Only $10.9 million in deposits were effectively unprotected, a small 1.3% sliver of USDP's total assets.

Source: Paxos

Rather than keeping 8% of its assets lodged at a second tier bank without insurance, why didn't Circle follow Paxos's risk reduction strategy?

There are 4,333 FDIC-insured banks and 4,760 NCUA-insured credit unions. The ability to invest $250,000 in each one offers theoretical headroom for around $2.3 billion worth of government insurance. The actual ceiling is much lower, since many banks and credit unions don't participate in deposit placement networks. But that's where private insurance comes in. How much private insurance could Circle have managed to secure? Paxos once again provides a hint. Last year it obtained a hefty $1.5 billion in private insurance for deposits backing BUSD, its largest stablecoin product. 

Combine these two options, and Circle could have easily avoided hyper-exposure to SVB. But it didn't go down that route.

In the article, Circle derides concerns over its deposit holdings as bordering on "risk reduction to absurdity," but the real absurdity here seems to be that Circle didn't engage in the same risk reduction as one of its competitors. Instead of angrily blaming others for what happened to it last March, Circle should probably accept some of the blame itself, and then very humbly thank American taxpayers for the bailout.


  1. Why do you think Circle didn’t spread deposits via a deposit placement network? i.e. do you think there’s anything that allows Paxos but prevented Circle from doing so?

    Not buying insurance could be explained by “it cost too much, we didn’t think we’d need it” although that calculus still doesn’t make a ton of sense. Keen to hear your views.

    1. It's hard to give Circle the benefit of the doubt.

      As far as deposit placement networks go, we know that Silicon Valley Bank offered access to one of the bigger ones, IntraFi (i.e., and many of the bank's customers used the product. I don't see why Circle couldn't have protected at least a billion worth of reserves this way.

      I don't know enough about the private insurance market, but I'd be surprised if Circle didn't have access to it.