Recent turmoil in traditional banking, culminating in USDC, Credit ratings agency Moody’s Investors Service believes that losing the peg could negatively impact stablecoin adoption and could increase calls for regulation.
Fiat-backed stablecoins could face new headwinds following the USDC depeg on March 10, Moody’s said in its latest “Industry Review” report published on March 16. “Large fiat-backed stablecoins have shown remarkable resilience so far, emerging unscathed from past scandals like the FTX debacle,” analysts Cristiano Ventricelli, Vincent Gusdorf, Rajeev Bamra, and Fabian Astic wrote. “However, Recent events have shown that the reliance of stablecoin issuers on relatively few off-chain financial institutions limits their stability."
The sudden collapse of Silicon Valley Bank on March 10 was a major risk event for USDC issuer Circle Internet Financial, which had $3.3 billion in assets at the bank. Over the course of three days, Circle liquidated roughly $3 billion in USDC redemptions as the value of its stablecoin plummeted to lows around $0.87. By the time U.S. banking closed on March 15, Circle had “essentially cleared all of its backlog of USDC minting and redemption requests,” the company said.
USDC was quickly re-pegged to the U.S. dollar after the FDIC announced it would back all deposits held by Silicon Valley Bank. Circle CEO Jeremy Allaire told Bloomberg on March 14 that his company can now fully draw on its $3.3 billion in reserves. Despite growing calls to regulate stablecoins in the wake of Terra's collapse, fiat-backed stablecoins like the one issued by Circle will not operate in the same way as Terra's failed algorithmic token in May 2022. Nonetheless, Moody's believes regulators will likely seek tighter oversight of the sector going forward.
The credit rating agency said USDC could only be re-pegged to the U.S. dollar after U.S. regulators decide to repay Silicon Valley Bank’s unsecured deposits. “Otherwise, USDC could suffer a run and be forced to liquidate its holdings,” the Moody’s analyst said, adding:
“Given the current market volatility, this situation could in turn lead to more runs on banks holding Circle assets, which could lead to a decoupling of other stablecoins.”
