Dante Disparte, the chief strategy officer and head of global policy at Circle Internet Financial, discussed the systemic risks that the traditional banking system poses to the cryptocurrency industry in an interview for an upcoming Word on the Block episode. Circle is the issuer of USDC, the second-largest stablecoin by market capitalization.
Disparte highlighted the issues faced by crypto companies due to the lack of confidence in banks, noting that the shutdown of Silicon Valley Bank (SVB) and Signature Bank, two major lenders to the crypto industry, demonstrates the risks that traditional financial institutions pose to the crypto ecosystem.
“The bank failures in the United States have demonstrated that banks themselves are introducing risk to crypto assets, versus the inherent direction of travel of risk, that a lot of the regulators were concerned about, is that crypto would introduce risk to banking,” said Disparte.
USDC is a dollar-backed stablecoin, meaning it maintains a stable value equivalent to the U.S. dollar. It currently holds a market capitalization of US$39.5 billion, making it the fifth-largest cryptocurrency.
USDC broke its dollar peg over the weekend after it was revealed that Circle held US$3.3 billion in reserve deposits at SVB. USDC fell to as low as US$0.8774 before regaining its dollar parity on Monday, according to CoinMarketCap data.
According to Disparte, USDC reserves are made up of “strictly” cash and short-dated treasuries, with 80% held in the latter, and that there is no safer asset class.
“The challenge is that the full faith and credit of the underlying banking system, on which that relied, had nascent risk in it, that started manifesting itself,” he said.
Codependence
However, Disparte said he believes that the crypto industry and banks have deep co-dependencies and that both can rise together, as many financial institutions are already leveraging blockchain infrastructure for payments and are interested in digital asset custodian solutions.
Disparte said that Circle has attracted more banks into the crypto sector than most digital asset firms. BNY Mellon is one of Circle’s major custodians, and the company partners with BlackRock to manage the Circle Reserve Fund.
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“It’s not [traditional finance] versus [decentralized finance and] it’s not crypto versus traditional banks. It’s actually a solid wall of shore up markets, shore up confidence, protecting consumers and ensuring, again, that the outcomes, in the long run, prove that this stress test could have been weathered by both traditional finance firms and companies like Circle,” Disparte said.
Disparte said that Circle is prepared to meet redemption demands but acknowledged the need for minting new USDC to provide a digital form of dollars that investors can hold to protect themselves from economic risks.
“All of these risks start to accrue to urgency from legislators, policymakers and regulators to begin to protect consumers at the comprehensive whole of government level, as opposed to relying on this patchwork approach that we have in the United States for regulating this industry.”