Crypto Shaken as SVB Exposure Depegs $37 Billion Stablecoin
(Bloomberg) — The fallout from the Silicon Valley Bank failure reached further into crypto, loosening a key cog in the market that is supposed to be among the safest digital assets in the space.
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The second-largest stablecoin fell from its intended $1 peg, trading as low as 81.5 cents as investors reacted to the exposure of issuer Circle Internet Financial Ltd. for the collapsed bank.
USD Coin, or USDC, is an asset-backed stablecoin and a widely used plank of crypto markets. The token is intended to maintain a constant $1 value, fully backed by reserves of cash and short-dated government bonds. But late Friday, Circle disclosed that $3.3 billion of its roughly $40 billion stockpile of reserves is held at Silicon Valley Bank, which just became one of the biggest U.S. bank failures in recent history.
Regulators seized the bank on Friday, and investors are waiting for more clarity on the return of deposits. In that vacuum, USDC fell below $1, trading at about 91 cents as of 8:45 a.m. in New York. Smaller stablecoins like DAI, which is sometimes seen as a proxy for USDC, and Pax Dollar also fell from their pegs. DAI is the fourth largest stablecoin in circulation and one of the most widely used tokens in decentralized finance.
“DAI is not a safe haven in this regard because much of it is secured directly by the USDC,” Michael Egorov, founder of decentralized exchange Curve Finance, said in an email.
USDC had a circulating supply of about 40 billion tokens as of Saturday morning in New York, CoinGecko data shows. A net $2 billion USDC was redeemed in the past 24 hours, according to blockchain research firm Nansen.
As for Circle’s larger rival, top stablecoin Tether has held steady at or above $1. While Tether has previously come under scrutiny over its reserves, it said on Friday it had no exposure to SVB.
Broader crypto markets are having a painful week and were on the back foot Saturday: Bitcoin oscillated between gains and losses, while smaller tokens such as Solana and Avalanche were in the red.
Circle’s Chief Strategy Officer Dante Disparte described the fall of Silicon Valley Bank as a “black swan failure” in the US financial system, saying in a tweet that without a federal bailout it would have “broader implications for business, banking and entrepreneurs.”
Coinbase’s Step
Stablecoins like USDC are meant to hold a fixed value against another highly liquid asset like the US dollar. They come in a variety of forms, and some, like Circles, are backed by reserves of cash and bonds. Investors often park funds in stablecoins when moving between crypto trades.
As the selloff in USDC worsened Friday night, US-based crypto exchange Coinbase Global Inc. said it will “temporarily pause” the conversion of USDC into US dollars over the weekend, and will resume on Monday when banks open. “Your assets remain safe and available for on-chain transmissions,” the crypto exchange said in a tweet from an official account.
Despite the turmoil, some see Circle regaining its footing. “The USDC is going to be OK, it’s resilient and well-managed, with a capital structure stronger than most banks,” Oliver von Landsberg-Sadie, co-founder of BCB Group, which runs a payment network for crypto companies, said in an e- mail.
Trading in USDC futures also suggests optimism Circle will overcome its current squeeze. Data from research firm Coinglass shows funding rates for USDC contracts on at least one exchange turned positive as of Saturday morning in New York, indicating that traders are betting on a restoration of the coin’s dollar peg. When a funding rate is positive, long positions pay off short positions, reflecting a bullish sentiment from traders on the token’s prices.
Meanwhile, the fall in USDC has had a knock-on effect on DeFi applications that allow users to trade, borrow and lend coins and which tend to rely heavily on trading pairs involving stablecoins. On Saturday, members of the DeFi community that runs DAI proposed changes to the mechanism that helps keep the stablecoin pegged to $1 in a way that would reduce exposure to USDC.
“Unless there is a concrete rescue plan this weekend, I think the markets will be ugly again next week,” Teong Hng, CEO of crypto investment firm Satori Research, said of SVB’s failure.
Crypto’s Misery
The crypto sector was already on a protracted rout that has hit $2 trillion worth of digital assets since November 2021, sparking a series of implosions such as the algorithmic TerraUSD stablecoin, Three Arrows Capital hedge fund and the FTX exchange.
The TerraUSD token – known as UST – tried to use a mix of algorithms and trading incentives involving a sister token, Luna, to hold its value. The $60 billion wipeout of this system intensified global regulatory scrutiny of stablecoins.
“I think the market priced USDC in panic like it priced USDT around the Luna collapse,” said Haohan Xu, CEO of Apifiny, an institutional trading platform. “It’s driven by Circle’s exposure at SVB plus Coinbase shutting down its USDC conversion feature.”
Trying to calm down
Crypto firms including Binance and Gemini took to Twitter on Friday to try to reassure their customers about any risks posed by the failed bank.
Changpeng Zhao, CEO of Binance, the largest digital asset exchange, tweeted that the firm has no exposure and that the funds are safe. Paxos Trust Co., issuer of the Pax Dollar, and crypto exchange Gemini said they have no relationship with the bank, according to statements on their official Twitter accounts.
By contrast, bankrupt crypto lender BlockFi has about $227 million in an account at the failed bank, according to a lawsuit.
–With assistance from Muyao Shen, Sunil Jagtiani, Olga Kharif and David Pan.
(Updates with further details on DAI starting in the fourth paragraph.)
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