Eurodollars and the Poor Cousin from America (USDC)

$3.3 billion of Circle’s USDC reserves are held at the failed Silicon Valley Bank. That is leading to USDC depeg and USDC is currently trading at 87 cents. 3.3B out of 40B market cap is about 92%. So the price should be 92 cents. However, as investors sell their USDC and the market cap of the stablecoin goes lower and lower those 3.3 billion loom larger and that can in turn lead to even lower prices of USDC. If USDC goes down to $20 billion market cap then USDC price should be around 82 cents. If it goes down to $10 billion, then it will be 66 cents. Where USDC price bottoms will reflect the potential outflow from USDC. I think Circle has money to cover the gap but it will have to scramble. And worse yet, the outflows will dent its ability to earn interest on their treasury holdings which it can use to cover the SVB loss. If Circle earned 6% on $40 billion that is 2.4B which covers about 75% of the loss (that would be 98 cents price for USDC). But if USDC continues to experience outflows, they may not be able to cover the gap with interest payments. And I am pretty sure they will experience outflows because Tether (USDT) is there at $1 and people would rather have their money in USDT than USDC. The whole point of a stablecoin is stability. These aren’t money people are gambling with. So Circle might totally bomb out here. We’ll see what happens. But for sure, I won’t be buying 90 cent USDC thinking that it will go back to par on Monday. I may be wrong, but I think a lot of money will move from USDC to USDT and that in turn will lead to ever lower USDC prices. In fact, I recommend you move your money from USDC to USDT immediately.

USDC is a US dollar inside the US banking system. USDT is a US dollar outside of the US banking system. USDT is a Digital Eurodollar.

You are probably asking: wait what? What is a Eurodollar? Yes, there is a large pool of US dollars abroad that are circulating in foreign banking systems. These dollars actually have no connection to the Federal Reserve and the US banking system. They are direct claims on US central bank reserves since they are US dollar bills, but they can’t be sanctioned or regulated because they are outside of the scope of US jurisdiction. Think about a US dollar bill I put in my pocket and traveled to China. I can buy something in China with that US dollar bill and the merchant in China can go deposit it with the local gangster who gives him one Tether USD dollar back on his phone. That US dollar then is in the hands of the gangster who buries in a pot deep underground and the Chinese merchant hopes the USDT on his phone doesn’t disappear because the gangster has a bad day. In other words, Eurodollars are subject to non-US country risk and the regulatory, banking and custody policies of various countries abroad. So far though, it seems the global investor in the cryptoverse much prefers the unsanctioned US dollar USDT as USDT has led USDC in market cap for its entire existence. The crypto crackdown by the Biden administration might further erode international confidence in the US banking system based US dollar stablecoins like USDC. The crypto industry then will shift its focus even more on the Eurodollar market (USDT) and that is a process that might get accelerated very quickly here. BTW, the word “euro” in Eurodollar doesn’t mean the “Euro” currency at all and also doesn’t mean dollars that are in European banks. They could be in Asia, Latin America, Africa, etc. Eurodollar is simply the word used for non-US dollars since the 50s. I know it is kind of confusing.

What does it mean for the US to have the reserve currency in the world? Every major transaction around the world happens in US dollars. But that doesn’t mean inside the US banking system or with the US banking system. China can trade with Vietnam using US dollars in their own banks that never touch the US banking system. China can get dollars from the US by exporting its product there and then China can use those dollars to trade with other countries. In fact, that is exactly what is happening. The Eurodollar got started in the 1950s during the Cold War when Russia was afraid the US would steal its US based dollar deposits and moved them to London. The first Eurodollar account was Soviet owned US dollars in a London bank. Later on China had similar concerns around the Korean War and moved its US dollars to a French bank. During the Marshall Plan years, America shipped aircraft carriers with cash to Europe in the tens of billions to do reconstruction there. If you remember recently, America left pallets of cash in Iran and Afghanistan. All of those are Eurodollars – US dollar bills that are as good as any other US dollar bill but better – they are not subject to US sanctions. But you have to deal with Afghanis or Iranians to get them. And for many that is fine. Thus a Eurodollar is a preferred payment instrument abroad.

What most Americans likely don’t understand quite well is the size of the Eurodollar market. It is massive. I have a cheat sheet printout on my wall from pre-COVID times to remind me of the size of the US economy and its various components. $25 trillion stock market (it is now 32 trillion), 20 trillion Treasury market, 10 trillion in bank savings, 10 trillion in mortgage debt (real estate), 4 trillion balance sheet, etc. I think I have to update that cheat sheet. LOL. Bank deposits today in the US are about $17 trillion. The Eurodollar market equivalent of bank deposits is about $20 trillion from what I was able to gather. Obviously it is hard to estimate Eurodollar size because it is in many jurisdictions. But it is not doubt massive. It rivals the banking deposits in the US. When you include the various derivatives the Eurodollar market is north of $50 trillion. There is a LOT of unsanctioned US dollar bills out there to back USDT. When the East/West financial systems separate, the US dollar price of Bitcoin will come from Eurodollar market. Actually, even today most of the pricing of Bitcoin comes from the Eurodollar market via USDT and Bitfinex. All the Bitcoin whale trades happen on Bitfinex. But that will become even more so going forward. And don’t worry, the Eurodollar gets fresh infusions every year since the US trade deficits go ever higher. The US is shoveling more and more unsanctioned US dollars abroad, about $1 trillion per year via the China channel. And those US dollars are obviously controlled not by Biden but by a different set of global leaders – Jinping, Putin, Ursula, MBS, Netanyahu, etc. As it stands, the Tether which issues USDT is technically based in Hong Kong, now a Chinese jurisdiction, and its parent company owns both Tether and the Bitfinex exchange.

Believe it or not, there is more US dollars outside of America in 2023 than in America. That makes USDC the poor cousin from America in the stablecoin market. I hope Circle survives Biden’s Operation Choke Point. I am not waiting to find out.

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