Circle reassures market after stablecoin USDC breaks dollar peg

LONDON, March 11 (Reuters) – Stablecoin USD Coin (USDC) lost its dollar peg and fell to a record low on Saturday before recovering most of its losses after Circle, the firm behind it, assured investors it would honor its peg to despite exposure to failed Silicon Valley Bank.

Circle said in a tweet on Friday that it has $3.3 billion of its $40 billion in USDC reserves at Silicon Valley Bank. On Saturday, the cryptocurrency company said in a blog post that USDC liquidity operations will resume as normal when banks open Monday morning in the United States.

“As a regulated payment token, USDC will remain redeemable 1 for 1 with US dollars,” the company said in a blog post.

The cryptocurrency firm said that in case the bank does not return 100% of deposits, it will cover any shortfall using corporate resources, involving external capital if necessary.

The coin, which broke its 1:1 dollar peg and fell as low as $0.88 just after 0800 GMT (3 a.m. EST) on Saturday, according to market tracker CoinGecko, recovered to trade around $0.97 by 2100 GMT.

Silicon Valley Bank collapsed on Friday in the biggest US bank failure since the 2008 financial crisis, roiling global markets and stranding billions of dollars belonging to companies and investors.

Circle said in a tweet on Friday that the company and USDC “continue to operate normally” while the firm waits for clarity on what will happen to Silicon Valley Bank depositors.

Meanwhile, US crypto exchange Coinbase said in a tweet that it did not allow USDC to be exchanged for US dollars over the weekend while banks are closed, citing “increased activity”, while it plans to resume trading on Monday.

Joseph Edwards, investment adviser at Enigma Securities, said the situation was “extremely dire” for the USDC.

“No matter how solid Circle’s operations are, this kind of depeg on a stablecoin tends to fundamentally undermine confidence in it,” Edwards said.

“The short-term implications here are dramatic and unknown, especially as systems begin to have to adjust to the reality that 1 USDC is not trading at 1 USD for now.”

CONSTANT EXCHANGE RATE

Stablecoins are cryptocurrencies designed to maintain a constant exchange rate with “fiat” currencies – those backed by a central government rather than a physical commodity like gold – for example through a 1:1 US dollar peg.

Used in cryptocurrency trading, they have increased in value in recent years. USDC is the second largest stablecoin with a market cap of $37 billion. The largest, Tether, has a market cap of $72 billion, according to CoinGecko.

USDC’s price usually stays close to $1, making Saturday’s drop unprecedented. According to CoinGecko data, its previous all-time low was around $0.97 in 2018, but in 2022 it fell just below $0.99 as cryptocurrency markets were rocked by the collapse of crypto hedge fund Three Arrows Capital.

Traders this week have been alert for signs of contagion in the financial sector and beyond from problems at Silicon Valley Bank and crypto-focused Silvergate ( SI.N ), which this week revealed plans to wind down operations and voluntarily liquidate.

Boston-based Circle said last week that it had moved a “small percentage” of USDC reserve deposits held at Silvergate to its other banking partners.

The CEO of cryptocurrency exchange Binance said in a tweet on Friday that it had no exposure to Silicon Valley Bank, as did Tether chief technology officer Paolo Ardoino.

Stablecoin issuer Paxos and crypto exchange Gemini also tweeted that they have no relationship with the bank.

Reporting by Elizabeth Howcroft in London and Rishabh Jaiswal in Bengaluru; Editing by William Mallard, David Holmes and Paul Simao

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