Circle’s Troubles Could Stoke Demand for Regulation of Stablecoins

There could be greater demand for regulation of stablecoins after USDC briefly lost its dollar peg.

Regulators had already been looking at stablecoins, and the turbulence seen over the weekend around USDC — which is the second biggest stablecoin — could cause them to sharpen their focus on the cryptocurrencies and their issuers’ risk management practices, Bloomberg reported Monday (March 13).

USDC dipped to as low as 86 cents after the issuer of the stablecoin, Circle, said that some of the funds backing the stablecoin were held at Silicon Valley Bank, which was closed and taken over by regulators on Friday.

The stablecoin regained its dollar peg after regulators said Sunday that the bank’s depositors would be made whole.

These ups and downs came at a time when Circle had been strengthening its position as a leader in the space, had ended 2022 profitable and had been experiencing growing usage of the stablecoin, according to Monday’s Bloomberg report.

The Securities and Exchange Commission (SEC) has already made some moves into the stablecoin space. For example, in February, the SEC sued the company behind TerraUSD for fraud and notified Paxos Trust that it was considering taking action and alleging that its BUSD token is an unregistered security, the report said.

As PYMNTS reported Feb. 22, those moves were among a number of warning shots across the bow of the digital asset industry that SEC Chairman Gary Gensler has issued since the start of the new year — and each has huge potential implications for the crypto landscape.

The New York State Department of Financial Services also has an interest in the backing of stablecoin reserves, per the report.

The report of the potential for heightened demand for regulation comes on the same day that it has been reported that, despite the stablecoin regaining its dollar peg, USDC traders could risk multimillion-dollar liquidations if it slips below $1 again this week.

There are nearly $71 million in positions that can be liquidated between $1 and 90 cents, CoinDesk reported Monday.

One position worth $20.7 million will be liquidated if USDC hits 99 cents, while another worth $15.4 million will do so if the stablecoin drops to 93 cents, according to the report.