The peg is held up by the belief that you can always get 1 USD for 1 USDC.
Obviously the market had some doubts about this today and then liquidity issues drove the price down. I'm somewhat surprised that it climbed back up this fast which means that the panic seems to be over (for the moment).
That means it's not really a peg. If you have a peg, it means that the currency issuer is willing to buy their currency for a set amount. Right now, Circle isn't willing to buy USDC for $1 USD - therefore, there is no peg.
Or maybe what we're talking about is a broken peg. Circle was willing to pay $1 USD for a USDC, but they're no longer willing to pay that (at least temporarily). Maybe countries have seen their pegs broken because they couldn't actually defend their peg. They'd promise "we'll give you $1 USD for every 2 PegCurrency" and then someone would come along with a ton of PegCurrency and ask for dollars and they wouldn't have enough dollars to give them. A peg only lasts as long as you have the currency to keep paying at that rate.
We'll have to see on Monday and Tuesday whether they will go back to defending their peg. Unlike many foreign currency pegs, they should have the cash to defend their peg to the last dollar (with the exception of losses incurred due to SVB going under). However, it still might mean a huge loss of confidence in USDC. If they're unable to offer liquidity when people want it, that's potentially a big problem for the product they're offering (but it also might not be: maybe people don't care about 24/7 liquidity and are ok with waiting several days for liquidity).
As far as I can tell, Circle is still willing to buy 1 USDC for 1 USD during business hours, which has always been Circle's policy.
What has changed is that third parties no longer have sufficient faith in that to extend the offer to 24/7. e.g. before Coinbase would give you USD for your USDC on Saturday morning because they were happy enough that they could take the USDC back to Circle and exchange into USD on Monday morning and that they had sufficient USD for the amount of people who were actually going to take them up on that.
Now because of either the worry about SVB contagion or the amount of withdrawals vs coinbase's usd reserves, coinbase is no longer willing to give you an advance on that action, and is making you wait until they can immediately exchange the usdc you give them for usd from circle. Coinbase was never the one under the obligation to give you USD for USDC anyway.
Obviously this is a little more complicated by Coinbase's 50% stake in Circle, but that's only relevant if a bankruptcy courts found misdeeds and a judge ruled Coinbase had to make up the shortfall due to said misdeeds, it's not a reason to be able to enforce Circle's liabilities on Coinbase as a day to day business matter.
> A peg only lasts as long as you have the currency to keep paying at that rate.
This logic applies to all bank deposits as well. SV Bank deposits were pegged to USD at a 1:1 ratio, they just broke the peg. People don't seem to realize USD bank deposits are not the same as USD. With "stable" coins it's more obvious because they have different names.
> "In such a case, Circle, as required by law under stored-value money transmission regulation, will stand behind USDC and cover any shortfall using corporate resources, involving external capital if necessary."
10% really is not enough to compensate for the uncertainty around Circle's commitment, whatever that is. More like be greedy when you have insider information.
Obviously the market had some doubts about this today and then liquidity issues drove the price down. I'm somewhat surprised that it climbed back up this fast which means that the panic seems to be over (for the moment).