Crypto market liquidity significantly improved as USDC regains dollar peg

The collapse of Silicon Valley Bank and other US banks led to market-wide panic and a decoupling of the USDC, draining liquidity from the crypto markets. However, liquidity improved sharply in the markets after the USDC regained its dollar peg, and crypto prices rose higher in recent days.

How the USDC lost its dollar peg

On March 10, Silicon Valley Bank, one of the most popular lenders to Silicon Valley technology and growth startups, failed after being exposed to a bank run. The collapse sent shockwaves across financial markets and even affected a number of crypto companies exposed to the bank.

For once, Circle, the issuer of the world’s second largest stablecoin USDC, revealed that it has $3.3 billion in an account maintained by the bank. Following the revelation, USDC was hit by a wave of redemptions as concerns about its reserves grew, causing the stablecoin to lose its peg.

Data from CoinMarketCap shows USDC’s price, which is supposed to be pegged to $1, fell to a record low of around $0.8774 on March 11. However, the stablecoin began to recover gradually after an influx of positive news.

In particular, US regulators announced a series of emergency measures shortly after the collapse. The US Federal Reserve, the Treasury Department and the FDIC announced that they would use the FDIC’s insurance funds to prevent depositors from losing money.

By March 13, the USDC was almost close to its $1 peg following the government’s assurance that depositors in the failed banks, including SVB, would be made whole. Jeremy Allaire, CEO of Circle, also praised the government’s intervention. He said in a statement:

“We are encouraged to see the US government and financial regulators taking decisive steps to reduce risks that extend from the banking system. We have long advocated for full-reserve digital currency banking that insulates our base layer of internet money and payment systems from fractional reserve banking risk .”

Currently, USDC is trading at $0.9984, according to data from CoinMarketCap. However, Circle has assured customers that USDC can still be redeemed 1-for-1 with US dollars.

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Liquidity improves in crypto markets after Circle regains Peg

During the first days of the USDC decoupling, liquidity in the crypto markets was halved as market participants pulled money out of the market. However, liquidity has improved dramatically over the past couple of days, largely due to USDC regaining its peg, according to a report from crypto data provider Kaiko.

The report said there was a massive increase of over $100 million in liquidity after the stablecoin regained its peg. More than $60 million of that amount belonged to the relisted USDC-USDT pair on Binance, while the USDC-USD pair on Kraken saw an infusion of $20 million in liquidity, Kaiko noted.

“Since then, there has been a gradual upward movement in overall liquidity as a result of the rally in crypto prices over the past week,” the report added. “With more liquidity comes less volatility as prices tend to have more support to both the upside and downside.”

This comes as Bitcoin climbed above $28,000, its highest level in nine months, on Monday amid a rally that saw major cryptocurrencies rise more than 15% in the past week in the wake of the current chaos ravaging the global banking system.

Meanwhile, Circle has selected Cross River Bank, a venture capital-backed, FDIC-insured regional bank in New Jersey, as its new partner to create and redeem USDC. The company has also “expanded relationships” with other banking partners to assist with USDC redemptions, including Bank of New York Mellon (BNY Mellon).

More recently, Circle has revealed that it will use Paris as a base to expand in the EU. During Paris Blockchain Week, CEO Allaire said that France is the right center “both for commercial and political reasons.”

Do you think cryptocurrencies will continue their rally amid the ongoing banking crisis? Let us know in the comments below.

About the author

Ruholamin Haqshanas is an accomplished crypto and financial journalist with over two years of experience writing in the field. He has a solid grasp of various segments of the FinTech space, including the decentralized iteration of financial systems (DeFi), and the emerging market for non-fungible tokens (NFT). He is an active user of digital assets for money transfers.