The cryptocurrency market is still struggling to come to terms with the collapse of Silicon Valley Bank, the largest US bank to fail in more than a decade. USD Coin, the second-largest stablecoin, has been caught in the center of the storm, briefly de-pegging from its traditional $1 value.
USD Coin Rebound
USD Coin, also referred to as USDC, jumped back up to its intended $1 dollar peg on Sunday after the issuer, Circle Internet Financial Ltd., pledged to cover any shortfall in the $3.3 billion reserves held at Silicon Valley Bank. The coin had earlier dropped as low as 85 cents and was trading at 98.2 cents as of 10:50 a.m. Sunday in Tokyo.
Circle reinforced their stablecoin is fully backed by $42.1 billion in cash and US Treasuries. In a statement, the company clarified there could be a delay in outbound transfers from Silicon Valley Bank which had been initiated Thursday. If a full return does not happen, Circle is obliged to cover any deficiency by using corporate resources and potential external capital.
This volatility in USDC has been reflected in other stablecoins such as Dai and Pax Dollar, though they have since steadied back to their intended pegs. Top stablecoin Tether or USDT, which has previously been marred by controversy and scrutiny over its reserves, said it does not have exposure to Silicon Valley Bank and has maintained its $1 price point or higher.
Regulatory Race
As the FDIC leads the auction for Silicon Valley Bank, the regulator is also racing to return a portion of deposits to their clients as soon as possible, with initial payments ranging from 30–50 percent or more. Investors are watching carefully as Circle, who is legally obligated to back USD Coin, handles the situation.
Circle’s Chief Strategy Officer Dante Disparte has described the fall of Silicon Valley Bank as a “black swan failure” in the US financial system, underlining the potential broader implications for businesses, banking, and entrepreneurs without a federal rescue plan.
Crypto Challenges
Since November 2021, the prolonged market downturn in the cryptocurrency space has caused a $2 trillion decrease in digital assets, resulting in a series of implosions like the algorithmic TerraUSD stablecoin, the Three Arrows Capital hedge fund and the FTX exchange.
The collapse of TerraUSD in particular has put additional pressure on the industry, raising questions over the stability of stablecoins. Yet some investors have remained optimistic that the USDC situation will rectify, with coin prices being bought up by traders in the meantime.
The ripple effect of USDC’s de-peg has been felt across decentralized finance (DeFi) applications, many of which make use of the stablecoin for trading, borrowing and lending coins. To reduce their exposure, members of the DeFi community running DAI proposed changes to the mechanism that helps keep the stablecoin pegged to $1.
The episode has also highlighted the risks associated with digital assets, serving as a reminder that the crypto sector is still very much in its infancy. Bitcoin is currently down around 9% over the period, the most since a 23% weekly decline in November after the failure of Sam Bankman-Fried’s FTX platform.
While the market continues to search for answers in the wake of Silicon Valley Bank’s collapse, investors wait in anticipation to find out if the industry will see the expected full return of the USDC reserves or if Circle will have to cover the potential shortfall.
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