Hello, thank you for this insight. You mentioned that Circle’s reserves might not be bankruptcy-remote, meaning USDC holders could be stuck waiting years as unsecured creditors in a liquidation. If that happened, wouldn’t USDC’s peg crash almost instantly, causing a liquidity crisis ? With how USDC is used across DeFi and exchanges, it looks like a huge risk for the entire crypto market.Is this a realistic danger, or am I overreacting?
If a judge ruled that USDC reserves were estate property in the case of a bankruptcy, the price would almost certainly decline, but probably not crash. Almost all of Circle's liabilities are to USDC holders, so is is unlikely they would be impaired much on a pro-rata basis in a bankruptcy. Take the markets estimate of that impairment, minus the time value of money, minus a risk premium, and you would get the market value of USDC, something less than a dollar but not much less.
USDC's use as a medium of exchange would likely be damaged badly by this, however. So it might impact the broader cryptocurrency ecosystem.
The truth is, if things got bad enough that Circle was bankrupt, we would probably have bigger problems on our hands.
Hello, thank you for this insight. You mentioned that Circle’s reserves might not be bankruptcy-remote, meaning USDC holders could be stuck waiting years as unsecured creditors in a liquidation. If that happened, wouldn’t USDC’s peg crash almost instantly, causing a liquidity crisis ? With how USDC is used across DeFi and exchanges, it looks like a huge risk for the entire crypto market.Is this a realistic danger, or am I overreacting?
If a judge ruled that USDC reserves were estate property in the case of a bankruptcy, the price would almost certainly decline, but probably not crash. Almost all of Circle's liabilities are to USDC holders, so is is unlikely they would be impaired much on a pro-rata basis in a bankruptcy. Take the markets estimate of that impairment, minus the time value of money, minus a risk premium, and you would get the market value of USDC, something less than a dollar but not much less.
USDC's use as a medium of exchange would likely be damaged badly by this, however. So it might impact the broader cryptocurrency ecosystem.
The truth is, if things got bad enough that Circle was bankrupt, we would probably have bigger problems on our hands.