SVB Exposure Shakes Crypto as $37 Billion Stablecoin Depegs

The impact from Silicon Valley Bank's bankruptcy expanded farther into crypto, unhinging a major component in the market that was supposed to be among the safest digital assets in the field.

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The second-largest stablecoin slipped from its planned $1 peg, trading as low as 81.5 cents as investors responded to issuer Circle Internet Finance Ltd.'s link to the failed bank.

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USD Coin, or USDC, is an asset-backed stablecoin and a popular crypto market pillar. The token is designed to have a constant $1 value and is completely backed by cash reserves and short-term Treasuries. Nevertheless, Circle announced late Friday that $3.3 billion of its nearly $40 billion reserve stockpile is held by Silicon Valley Bank, which has just become one of the greatest US bank failures in recent history.

On Friday, regulators seized the bank, and investors are waiting for additional information on the return of funds. The USDC slipped below $1 in that vacuum, trading at around 91 cents as of 8:45 a.m. New York. Lesser stablecoins such as DAI, which is frequently used as a proxy for USDC, and Pax Dollar also lost ground. DAI is the fourth-most-circulated stablecoin.

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"DAI is not a safe haven in this aspect because a large portion of it is directly collateralized by USDC," Michael Egorov, creator of decentralized exchange Curve Finance, wrote in an email.

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According to an statistics, USDC has a circulating supply of roughly 40 billion tokens as of Saturday AM in New York. According to blockchain research firm Nansen, a total of $2 billion in USDC has been redeemed in the last 24 hours. According to Bloomberg data, USDC traded as low as 81.5 cents.

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Tether, the leading stablecoin, has remained stable at or above $1. Tether has previously faced criticism over its reserves, but it stated on Friday that it had no exposure to SVB.

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The larger crypto markets have had a difficult week and were down on Saturday: Bitcoin fluctuated between gains and losses, while smaller tokens like Solana and Avalanche were down.

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Circle's Chief Strategy Officer Dante Disparte called Silicon Valley Bank's bankruptcy a "black swan disaster" in the US financial system, stating in a tweet that there would be "broader consequences for business, banking, and entrepreneurs" if there was no federal rescue plan.

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Coinbase’s Step

Stablecoins, such as USDC, are designed to have a fixed value against another, highly liquid asset, such as the US dollar. They exist in a range of shapes and sizes, and some, like Circle's, are supported by cash and bond reserves. When they travel between crypto deals, investors frequently store funds in stablecoins.

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When the USDC selloff escalated on Friday night, US-based crypto exchange Coinbase Global Inc. said that it would be "temporarily suspending" USDC conversions into US dollars for the weekend, and would restart on Monday when banks reopened. "Your funds are safe and accessible for on-chain sends," the crypto exchange claimed via a tweet from an official account.

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Despite the upheaval, some believe Circle will regain its footing. "USDC is going to be OK; it is resilient and professionally managed, with a capital structure better than most banks," Oliver von Landsberg-Sadie, co-founder of BCB Group, which runs a payment network for crypto firms, wrote in an email.

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Meanwhile, the decline in USDC has had an impact on decentralized banking services that let users to trade, borrow, and lend currencies and rely largely on trading pairings including the stablecoin.

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"Unless there's a solid bailout plan this weekend, I fear markets will be nasty again next week," Teong Hng, CEO of crypto investing firm Satori Research, said of SVB's failure.

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Crypto’s Woes

The crypto market was already reeling from a lengthy downturn that had slashed the value of digital assets by $2 trillion since November 2021, resulting in a succession of implosions such as the algorithmic TerraUSD stablecoin, the Three Arrows Capital hedge fund, and the FTX exchange. The TerraUSD token, abbreviated as UST, attempted to maintain its value by a combination of algorithms and trading incentives involving a sister token, Luna. The system's $60 billion demise increased global regulatory scrutiny of stablecoins.

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"I believe the market 'panic priced' USDC same to how it priced USDT around the Luna crash," said Haohan Xu, CEO of Apifiny, an institutional trading platform. "It's due to Circle's exposure at SVB, as well as Coinbase shutting down its USDC convert function."

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Reassurance

On Friday, cryptocurrency companies such as Binance and Gemini used Twitter to try to reassure its consumers about any hazards posed by the bankrupt bank.

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Changpeng Zhao, CEO of Binance, the largest digital-asset exchange, stated that the company has no exposure and that its money are secure. According to remarks on their official Twitter accounts, Paxos Trust Co., the issuer of Pax Dollar, and cryptocurrency exchange Gemini both said that they had no ties with the bank.

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According to a court document, bankrupt crypto lender BlockFi has around $227 million in an account with the failing bank.

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