Emergency Allocation

Currently USDC is depegged to the tune of $.91 for one USDC. This proposal would enable strategists to either take advantage of the lower price and allocate more of the treasury to USDC, with the presumption that it will return to dollar parity, or remove our USDC and DAI exposure completely, realize the loss but move to the current safe haven asset USDT.

What’s happening: Circle, the company who creates USDC, has publicly stated that they have 3.3b in USD exposed to Silicon Valley Bank (https://twitter.com/circle/status/1634391505988206592?cxt=HHwWgIC-pcqaw64tAAAA), which experienced a bank run yesterday and is likely insolvent (https://www.bloomberg.com/news/articles/2023-03-10/silicon-valley-bank-collapses-enters-fdic-receivership). Assuming the worst case scenario, this $3.3b hole in the $40b backing of USDC would put its value at about $.9175

Argument for allocating more to USDC: -The $3.3b is almost certainly not all gone, SVB had about $209 billion in total assets and about $175.4 billion in total deposits at the end of last year according to the FDIC, and was looking to raise about $2b this week to cover their balance sheet hole. The hole is likely wider than that but if it were only $2b short that would mean that only ~$33m is missing from USDCs backing and its ‘value’ is still within a few basis points of $1 -It seems unlikely that Circle would be unable to raise money to back itself even if there were a significant hole. This isn’t the same thing as for instance FTX looking for a bailout, the business model is about as low risk as they come -Allocating our $11m in USDT to USDC would net OUSD ~1m in profit if USDC returned to dollar parity, a 3.5% gain

Argument against allocating more to USDC: -If circle is unable to reclaim the $3.3b in backing, or the money becomes stuck in the process of liquidating SVB, the price of USDC could actually fall much lower. They have halted redemptions temporarily, but if they were to resume without the backing, for every dollar reclaimed 1:1 the rest of the USDC in circulation would be backed by less USD. I personally don’t think they would allow this to happen since it would blow up their business model even further but it is a possibility. -If this were to happen, OUSD is already on the hook for substantial losses from the 58% of our supply backed by USDC and DAI (which is largely backed by USDC). Allocating even more would just cause greater losses

There is also a compelling argument to do nothing: -moving the backing from USDC and DAI to USDT would recognize a ~$1.5m loss, and USDT may not be safer if there are further effects to the traditional banking industry -USDC could take a long time to return to its $1 peg if the SVB funds become stuck in liquidation limbo and Circle keeps redemptions paused, this could hamstring our strategy options long term (we wouldn’t be able to allocate to 3pool without changing our exposure back to all three coins) -remaining exposed to all three 3pool coins may be the best bet given the uncertainty of the situation, a not putting all are eggs in one basket sort of situation

The options are: -Allocate all current USDT holdings to USDC -Allocate all current USDC and DAI holdings to USDT -Do nothing