Stablecoin USDC, part of Crypto’s bedrock, is trapped in Silicon Valley Bank

USDC is a so-called stablecoin, whose value is linked to one dollar. Stablecoin issuers like Circle maintain the bond by holding reserves in safe assets like Treasurys and bank deposits. Silicon Valley Bank was one of six banks that Circle used, the company said. The company had last week withdrawn the last of the reserves it held on a seventh, Silvergate Bank, shortly before that institution announced it would wind up operations.

Silicon Valley Bank “is a critical bank in the U.S. economy, and its failure — without a federal bailout — would have broader implications for business, banking and entrepreneurs,” Circle Chief Strategy Officer Dante Disparte said in a tweet Friday night, and added that Circle “protected #USDC from a black swan failure of the US banking system.”

Circle had sent a wire transfer request Thursday before the FDIC takeover, the company sobut it was not processed.

Unlike previous crypto struggles — such as the failures of crypto lenders like Celsius Network and Voyager Digital — the problems at USDC hit what is believed to be the “boring” part of crypto. USDC and other stable coins like Tether are most often used by crypto traders as a sort of parking space between investments in more volatile tokens like Bitcoin. Investors can easily send stablecoins between exchanges or move in and out of coins almost instantly, without having to deal with banks that can sometimes take days to settle transactions.

Stablecoins maintain the link by promising to always let investors redeem tokens for traditional money deposited in a bank account, and regulators have previously worried about how investors might react if some coins don’t have the reserves they promised.

As of March 9, Circle said it had $43.5 billion in reserves backing $43.4 billion in USDC tokens, meaning any significant haircut on Silicon Valley Bank deposits would be more than enough to put the token underwater.

“Circle and USDC continue to operate normally,” a Circle spokesperson said earlier Friday.

It appears that some token investors are already moving quickly out of USDC.

The token’s price began to break out of the dollar on Friday afternoon, falling as low as 94 cents on the dollar, compared to rival Tether. It fell as low as 88 cents as of 2:50 a.m. EST on Saturday, before recovering to about 91 cents later in the morning, according to CoinMarketCap.com. The token’s total market capitalization as of 3pm on Friday had fallen by $5.9 billion to $37.7 billion, indicating that investors are cashing in large amounts of the token.

USDC, which also shares revenue with trading platform Coinbase Global

(ticker: COIN), had been seen as a more regulated alternative to Tether, the largest stablecoin at $73.7 billion. Any lack of faith in the coin could send more assets to Tether and contribute to volatility in the price of Bitcoin and other tokens as investors lose one of the main mechanisms they used to trade.

Falling assets at USDC could also hit Coinbase, which under an agreement with Circle shares a portion of the revenue that USDC’s reserves generate. Coinbase late Friday so there was a “temporary pause” in conversions between USDC and regular dollars over the weekend, citing increased activity and the need to wait for dollar transfers from banks that clear during normal business hours.

In the fourth quarter, Coinbase earned $182.2 million in interest income, which includes income from USDC, up from $7.6 million a year earlier, boosted by rising prices. The firm in its annual report also said it had $861.1 million in USDC at the end of last year.

A spokesperson for Coinbase declined to comment.

Write to Joe Light at [email protected]