Circle Shifts USDC Reserves Amid US Debt Default Concerns

Stablecoin issuer Circle has reportedly adjusted its treasury reserves to mitigate the risk of US debt defaults.

Amid the ongoing banking crisis in the United States, Circle CEO Jeremy Allaire stated on May 10 that the company has altered the mix of reserves backing its USD Coin (USDC) by transitioning to short-dated US Treasurys to sidestep potential involvement in a US debt default. Allaire explains that Circle no longer holds Treasuries with maturities beyond early June to minimize debt exposure.

"We don't want to carry exposure through a potential breach of the ability of the U.S. government to pay its debts," the executive said.

The Blackrock-managed Circle Reserve Fund reveals holdings maturing no later than May 31.

Treasury Secretary Janet Yellen recently indicated that the government would have to make "decisions" if Congress fails to raise the federal debt limit. The $24 trillion Treasury market and the global financial system could experience significant disruption if the country defaulted on its debts. Currently, US President Joe Biden and Republicans are in disagreement over raising the $31.4 trillion borrowing limit.

Tether, another stablecoin issuer, claims that most of its reserves are invested in Treasury bills with an average maturity of fewer than 90 days. According to a May 10 quarterly assurance report, the firm has been "working to take steps to reduce its reliance on pure bank deposits as a source of liquidity."

Over the past year, the USDC supply has been declining, dropping by 46% from its all-time high of $56 billion in June 2022. This has led to a decrease in its market share to 23%, with a circulation of $30 billion. In contrast, rival Tether's market dominance has increased to 62%, with a circulation of $82 billion USDT (USDT). Notably, Circle recently launched a cross-chain transfer protocol for $USDC via Ethereum and other EVM-compatible chains.

Circle's USDC stablecoin remains the second-largest stablecoin with a market cap of $30 billion. This year, Circle has faced turbulent times, with the USDC stablecoin losing its peg in March 2023, leading to significant withdrawals from the USD Coin and a market cap drop of over 25%.

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