Risk Analysis on Centralized Stablecoins

Introduction

As a critical component in the crypto ecosystem, stablecoins play a vital role in providing a safe haven for investors and serving as the asset of choice across exchanges, lending markets, and virtually all of DeFi. Currently, the total value of stablecoins stands at $135B, representing ~10.5% of the entire crypto market capitalization. Ideally, stablecoins should trade at parity to the asset they’re pegged to. However, recent events have shown that deviations from the peg can occur for a variety of reasons.

In our report, we will examine the factors that contribute to depeg events, analyze each centralized stablecoin through its balance sheet, and assess the actual risk associated with holding those stablecoins.

Recent Stablecoin Events

Before delving into specifics, it is crucial to understand the reasons behind stablecoin depegging and its primary causes. Here are some noteworthy examples:

• SVB Collapse: The recent Silicon Valley Bank (SVB) collapse resulted from a bank run due to a mismatch between the duration of their assets and liabilities. SVB invested in long-dated government bonds which lost significant value on a mark-to-market basis as the Federal Reserve aggressively raised interest rates to curb inflation. SVB sought to sell its $21.5B bond portfolio through Goldman Sachs and raise capital via a stock sale to rectify the mismatch. However, a bank run occurred before the necessary funds were raised, leading to their collapse. Consequently, with Circle holding $3.3B at SVB, USDC depegged to a low of $0.87 but later repegged to $1 after U.S. regulators intervened to backstop deposits.

• NYDFS Halts BUSD Minting: On February 13th, 2023, the New York State Department of Financial Services (NYDFS) ordered Paxos to cease the minting of BUSD due to “several unresolved issues related to Paxos’ oversight of its relationship with Binance.” Although this had no material impact on BUSD’s reserve assets and the stablecoin did not depeg, it led to a substantial outflow of BUSD redemptions, with $9.5B redeemed since the minting halt.

• UST-LUNA Bank Run: UST is an algorithmic stablecoin. To mint a dollar of UST, an equivalent dollar of LUNA is required to be burned. Fur