SVB Collapse Sparks Stablecoin Turmoil as USDC Loses Peg

Jul 10, 2023

USDC, a stablecoin linked to the dollar, lost its peg to the U.S. currency amid a surge of investor withdrawals after its founder, Circle Internet Financial Ltd., said it had $3.3 billion invested in the collapsed Silicon Valley Bank.

Circle's USDC stablecoin saw customers withdrawing billions in the last 24 hours with its market cap dropping to $37 billion from $43.5 billion, and the coin's price falling below $0.87 Saturday morning. USDC is the second-largest stablecoin in the cryptocurrency market after Tether, which has a market cap of $72 billion.

Silicon Valley Bank (SIVB) collapsed on Friday, marking the largest U.S. bank failure since the 2008 financial crisis, sending shockwaves through the banking sector. Circle and crypto exchange Coinbase created USDC in a joint venture announced in 2018.

"Following the confirmation at the end of today that the wires initiated on Thursday to remove balances were not yet processed, $3.3 billion of the ~$40 billion of USDC reserves remain at SVB," a Circle tweet said. That $40 billion figure has now been reduced and almost 10% of the USDC reserves are now held in the failed bank. Stablecoins are used as a fiat-to-cryptocurrency on-ramp. The 1:1 peg to the U.S. dollar is based on investor trust and requires equal backing with U.S. dollar assets. Payments giants Visa (V) and Mastercard (MA) were both previously involved in the testing of crypto payments using USDC.

USDC rebounded from its lows later on Saturday after Circle said it would cover any shortfall and said it would resume redemptions early Monday.The cryptocurrency sector faces a major headache with another stablecoin in trouble. Tether and USDC had recently shad investor inflows as investors moved their funds from crypto exchange Binance's BUSD. Paxos was involved in a commercial partnership to mint the stablecoin for Binance, the world's largest crypto exchange. Then regulators forced the company to halt the agreement in February and BUSD lost more than 50% of its market cap. The latest problems with the USDC coin will leave crypto investors with limited options of where to park their cash holdings.

Circle, founded in 2013, lists its headquarters as being a "remote-first" company. Its website says "every digital dollar of USDC on the internet is 100% backed by cash and short-dated U.S. treasuries," and that "USDC reserves are held in the custody and management of leading U.S. financial institutions, including BlackRock and BNY Mellon". Circle will now have to back up the claim that its reserves are fully backed 1:1. That could involve a cash infusion from the company or a potential bailout of Silicon Valley Bank by the U.S. government.

The stablecoin sector has been under intense scrutiny by regulators since the $40 billion collapse of the TerraUSD stablecoin last May. The latest turmoil creates further uncertainty for investors in cryptocurrency and will add to the chorus of voices calling for tighter regulation. Federal Reserve Chairman Jerome Powell's comments this week that he sees "turmoil," and "run risk" in digital currencies haven't aged well in light of the Silicon Valley Bank collapse.

Twitter. "Circle Status".

CoinMarketCap. "USDC Coin Market Cap".

https://www.washingtonpost.com/business/2023/03/11/silicon-valley-bank-washington-mutual-failure/

Twitter. "Circle Status".

Visa. "Visa Becomes First Major Payments Network to Settle in USDC".

CoinDesk. "Mastercard to Test USDC Payments".

Business Insider. "Billionaire Bill Ackman Calls on US Government to Bailout SIVB".

Circle. "USDC Transparency".