How stable is USDT in the banking crisis of 2023?
Global Banking Crisis in 2023? A Troubling Trend Continues. Despite efforts to prevent further financial crises, the world is once again facing a global banking crisis in 2023. To get a better understanding of the current situation, it’s crucial to examine the events leading up to it and identify who has benefited from the turmoil.
To start, it’s important to know a few key terms:
- Stablecoins: These are cryptocurrencies designed to maintain a stable value by pegging their market value to another currency, commodity, or financial instrument, ensuring price stability.
- Tether (USDT): Launched in 2014, Tether is a stablecoin pegged to the US dollar and backed by Tether’s reserves. As of January 2023, it was the third-largest cryptocurrency and the largest stablecoin, with a market capitalization of nearly $68 billion.
- USD Coin (USDC): A digital dollar pegged to the US dollar at a one-to-one ratio, USDC is backed by dollar-denominated assets held in segregated accounts with US regulated financial institutions and runs on the Ethereum blockchain.
In order to gain an understanding of the current situation, let’s examine the sequence of events that have led us to the impending economic crisis.
Banking crisis of 2023
Within a short period of time this year, three banks that previously accepted deposits from cryptocurrency companies – Silicon Valley Bank (SVB), Signature Bank, and Silvergate Capital – all failed. This demonstrated that stablecoins, which are designed to maintain a stable value, may not always remain stable. Fintech firm Circle disclosed that it had a $3.3 billion exposure to SVB, causing the value of its USDC token to briefly drop to 88 cents instead of its usual one-dollar price. However, US regulators intervened to ensure the security of deposits at Silicon Valley Bank, and Circle pledged financial support, ultimately helping the token to recover its value. There were many events that occurred in March, and for those interested in a chronological breakdown of these events, the following table is available:
|March 8||Crypto-friendly bank Silvergate Capital Corp announced it would wind down operations and voluntarily liquidate. Silicon Valley Bank (SVB) announced plans to raise $2.25 billion.|
|March 9||The S&P 500 bank index fell sharply following SVB’s announcement and Silvergate’s decision. SVB’s stock price dropped by 60%, causing the company to reassure its clients their money was safe.|
|March 10||A regulator shut down SVB and appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. Some other U.S. bank stocks also fell. First Republic Bank and Western Alliance assured investors that their liquidity and deposits were strong. SVB CEO Greg Becker resigned from the board of directors at the Federal Reserve Bank of San Francisco. U.S. Treasury Secretary Janet Yellen met with banking regulators on the SVB collapse.|
|March 11||The U.S. Federal Reserve and FDIC considered creating a fund to backstop more deposits at banks.|
|March 12||Yellen said she was working with banking regulators to respond to the SVB collapse. New York state’s Department of Financial Services took possession of New York-based Signature Bank.|
|March 13||HSBC acquired the UK subsidiary of Silicon Valley Bank for £1. The FDIC transferred all deposits of SVB to a newly created bridge bank. U.S. President Joe Biden assured Americans that the banking system was safe. Western Alliance Bancorp assured investors that over 50% of its total deposits were insured and it had over $25 billion of cash reserves. Shares of some U.S. regional banks slumped and credit risk indicators increased.|
|March 14||Moody’s revised its outlook on the U.S. banking system to “negative” from “stable”, citing heightened risks. U.S. prosecutors began investigating the collapse of SVB.|
|March 15||Credit Suisse announced plans to strengthen its liquidity by borrowing up to CHF 50 billion ($54 billion) from the Swiss National Bank.|
|March 16||Yellen said uninsured deposits would only be guaranteed in banks deemed a contagion threat, causing concern about smaller banks. Large U.S. banks injected $30 billion in deposits into First Republic Bank to shore up the lender’s finances.|
|March 17||SVB Financial Group filed for Chapter 11 bankruptcy protection.|
|March 18||UBS considered a takeover of Credit Suisse with the Swiss government offering a guarantee against the risks involved.|
|March 19||UBS agreed to buy Credit Suisse for 3 billion Swiss francs in stock and agreed to assume up to 5 billion francs in losses.|
|March 20||The FDIC decided to break up SVB and hold two separate auctions for its traditional deposits unit and its private bank after failing to find a buyer for the lender.|
|March 21||Yellen told bankers that she was prepared to intervene to protect depositors in smaller U.S. banks.|
|March 22||Yellen said she had not considered or discussed “blanket insurance” to U.S. banking deposits without approval by Congress, causing investor worry. Federal Reserve Chair Jerome Powell said SVB’s failure was not indicative of wider weaknesses in the banking system.|
|March 24||Deutsche Bank’s shares dropped and the cost of insuring the company’s bonds against default spiked. Other banking stocks also slumped in Europe.|
|March 25||U.S. authorities considered expanding an emergency lending facility to offer more support to banks.|
|March 27||First Citizens BancShares announced it would acquire the deposits and loans of failed Silicon Valley Bank.|
A recent report from the Federal Reserve, responsible for managing the US economy, discusses the potential repercussions of recent issues within the banking sector. The report warns of the possibility of a recession later in the year due to the banking crisis. The Fed staff anticipate a mild recession, followed by a recovery over the next two years.
Additionally, the report reveals that the Fed expects a GDP growth rate of only 0.4% in 2023, suggesting a slowdown in the economy. This follows a 0.25 percentage point increase in the benchmark borrowing rate by the Federal Reserve, bringing the target range to 4.75%-5%, its highest level since 2007. The rate increase occurred merely two weeks after the collapse of Silicon Valley Bank, one of the largest banks in the US, caused by a run on deposits. As a result of the bank failures, emergency lending facilities were created to ensure banks could continue to operate.
The Fed’s inflation data has largely met its goals, but there is still uncertainty surrounding the overall economic situation, particularly in light of the banking problems. In response, Fed officials have established a new borrowing facility for banks and relaxed conditions for emergency loans at the discount window to assist the industry during these difficult times. Despite these measures, officials predict that lending will tighten, and credit conditions will deteriorate, indicating further trouble for the economy.
Some policymakers debated whether to keep rates steady while they monitored the crisis, but ultimately agreed to another rate hike “because of elevated inflation, the strength of the recent economic data, and their commitment to bringing inflation down to the Committee’s 2 percent longer-run goal.”
The bottom line is that the economic outlook is bleak, but amidst it all, USDT seems to be thriving.
Stability of Tether(USDT) in 2023
During the recent banking crisis in the US, traders seeking a stable investment option have turned to the controversial stablecoin Tether (USDT). The collapse of banks such as Silvergate and Silicon Valley Bank has exposed the instability of heavily regulated, dollar-backed stablecoins like USD Coin (USDC), which fell below 90 cents. Decentralized stablecoins frax and dai also depegged from their intended dollar value. In contrast, Tether’s USDT, which is not reliant on dollars held in American banks, has remained closer to its dollar peg and even traded at a premium. This is likely due to its low exposure to the US banking system, making it a safer option for investors. However, both stablecoins experienced price dips below their dollar value, highlighting that stablecoins, even those pegged to fiat currencies, are still subject to the influence of banks and government actions.
Tether’s Q1 profits of $700 million and surpassing the $1 billion threshold for excess reserves is a significant development in the stablecoin market. Stablecoins are designed to provide a hedge against price volatility, making them an appealing investment option for less experienced investors. Tether’s growth reflects the increasing adoption of stablecoins as a safer investment alternative. However, Tether has been criticized for its lack of transparency in financing, with the company failing to disclose the location of the companies from which it purchased its debt. Although the company has transferred its holdings to more reliable U.S. Treasuries, the lack of transparency remains a concern for some investors. The growing use of Tether in the aftermath of the Silicon Valley Bank’s collapse underscores the importance of stablecoins in mitigating risk and maintaining the stability of the cryptocurrency market.
Tether’s ability to remain stable during the banking crisis can be attributed to its lack of direct exposure to Silicon Valley Bank, unlike other stablecoins that relied heavily on the bank’s deposits. These stablecoins depegged due to their collateralization with USDC. However, investors should still exercise caution with Tether as it has faced criticism and redemption issues in the past. Conducting further stress tests would provide a better understanding of its long-term resilience.
To assess the stability of USDT, let us compare it to USDC using the following statistics:
1. Graph of the USDT’s price changes
2. Graph of the USDC’s price changes
Also, let’s look at the numerical data :
|Market cap:The high market capitalization of a coin suggests that it is highly valued by the market.||$81.5B||$30.8B|
|Typical hold time:A long hold time indicates that investors are accumulating the asset, while a short hold time implies more frequent token movement.||4 days||19 days|
|Circulating supply:The circulating supply refers to the total number of coins or tokens issued so far, and we also provide the percentage of the maximum supply if applicable. Assets with low circulating supply and high maximum supply could experience significant inflation, while the opposite could also be true.||81.5B USDT||30.8B USDC|
|All time high:The asset’s highest price since its launch or listing.||$1.22||$1.00|
|Dominance:The percentage of social media posts about the coin compared to the total market in the past 24 hours. A coin with high social dominance is likely to perform well.||0.54%||0.36%|
|Contributors:The social media mentions metric for USD Coin indicates the number of recent posts on Twitter, Reddit, news sources, and other platforms that mention this particular coin within the past 24 hours. If an asset receives significant attention on social media, it may suggest that it has potential.||650||339|
|Posts:The social volume metric, which measures the amount of coin mentioned in social media posts, including those on Twitter and Reddit, indicates the overall level of interest in the asset. Assets with a large social volume tend to have the potential for good performance.||29,880||20,855|
Based on the current data, USDT appears to be the top stablecoin, but it is uncertain whether it will remain so in the future. Both USDC and USDT are centralized stablecoins that are crucial to the cryptocurrency economy, serving as a primary trading tool for DeFi products and traditional crypto exchanges. However, recent events such as the collapse of TerraLUNA and regulatory crackdowns have exposed the industry’s overleveraged nature.
Banks that enter the Web3 space are also facing scrutiny and being advised against serving the crypto industry, highlighting the need for cryptocurrency to decouple from fiat currency. There are already algorithmic and crypto-backed stablecoins that only use bitcoin and/or ether to mint and redeem stablecoins on demand for any currency, and this may be a solution for the crypto ecosystem to become more resilient to banking crises. Ultimately, if cryptocurrency is to offer users the ability to hedge against dollar instability, it may need to start bootstrapping liquidity with native solutions.
According to the analysis, although USDT has proven to be a secure choice for traders amidst recent banking problems, it is essential to exercise caution due to Tether’s history of FUD and redemption issues. The market highly values the potential of stablecoins, and their demand continues to remain strong. Additionally, stablecoin hedging strategies have proven to be effective and resilient, demonstrating their ability to quickly recover their pegs during challenging times. Nonetheless, the long-term resilience of stablecoins such as Tether remains to be seen, and further stress testing may be required to assess their stability moving forward.