Crypto takes a breather as USDC Stablecoin rebounds towards peg after being beaten by SVB Exposure

by Arthur · March 12, 2023

(Bloomberg) — Crypto’s second-largest stablecoin bounced back toward its intended $1 peg as issuer Circle Internet Financial Ltd. pledged to cover any losses on $3.3 billion in reverse held at the collapsed Silicon Valley Bank.

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USD Coin, a key plank in the crypto markets, rose as high as $1 to trade at 98.2 cents at 10:50 a.m. Sunday in Tokyo. The coin had previously fetched less than 85 cents in a dip that sent a shudder through digital assets.

Circle reiterated that its stablecoin, also known as USDC, is fully backed by $42.1 billion in cash and US Treasuries. The company said outbound transfers of $3.3 billion at Silicon Valley Bank initiated on Thursday had not yet settled, but expressed confidence in US regulatory efforts to deal with the overall situation.

Circle said it is possible “SVB may not return 100% and that any return may take some time,” in which case the firm “as required by law under stored value transfer regulation, will stand behind USDC and cover any shortfalls by use the company’s resources, involving external capital if necessary.”

Volatility in USDC, which is supposed to be one of the safest assets in crypto with a constant value of $1, had spread to other stablecoins like Dai and Pax Dollar, but they were also pushing closer to their pegs. Top stablecoin Tether or USDT — which has previously come under scrutiny over its reserves — said on Friday it has no exposure to Silicon Valley Bank and has held firm at $1 or above.

“There’s been two-way flow of some just freaking out and wanting out of the USDC,” said Spencer Hallarn, derivatives trader at investment firm GSR. Some investors moved to Tether “as a temporary safe haven” while, on the other hand, USDC “does the math on likely depreciation and value buying,” he said.

Race for deposits

On Friday, Silicon Valley Bank Bank became the largest US lender to fail in more than a decade. Deposits up to the Federal Deposit Insurance Corp. its protected limit of $250,000 should be available on Monday.

Regulators are racing to sell assets and make some of customers’ uninsured deposits available as soon as possible – figures being floated behind the scenes for an initial payment range from 30% to 50% or more.

In earlier tweets, 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 that without a federal bailout it would have “broader implications for business, banking and entrepreneurs.”

Stablecoins should have a fixed value against another highly liquid asset such as the US dollar. Some, like Circles, are backed by reserves of cash and bonds. Investors often park funds in stablecoins when moving between crypto trades or accessing blockchain-based financial services.

‘The situation will correct itself’

USDC has a circulating supply of about 41 billion tokens with a market capitalization of roughly $40 billion, CoinGecko data shows. The token, worth billions of dollars, has been redeemed by traders since Friday.

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.

“The USDC situation is likely to correct,” wrote Noelle Acheson, author of the “Crypto Is Macro Now” newsletter. “Monday should bring news of a resolution for SVB depositors, and Circle will be able to recover at least some funds in the short term, while notes can be exchanged for the rest.”

The fluctuations in USDC had a knock-on effect on decentralized finance – or DeFi – applications, which allow users to trade, borrow and lend coins and 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 to reduce exposure to USDC.

Crypto’s challenges

The crypto sector continues to reel from a long-running rout that has hit $2 trillion in digital asset value since November 2021, sparking a series of implosions such as the algorithmic TerraUSD stablecoin, the 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 regulatory scrutiny of stablecoins.

“The market ‘panic priced’ USDC like it priced USDT around the Luna collapse,” said Haohan Xu, CEO of Apifiny, an institutional trading platform.

Major digital asset markets round off a week of losses. Bitcoin is down around 9% during the period, the most since a 23% weekly drop in November amid the collapse of Sam Bankman-Fried’s FTX platform.

For crypto market prices: CRYP; for the best crypto news: TOP CRYPTO.

–With assistance from Suvashree Ghosh, Olga Kharif, David Pan and Shiyin Chen.

(Updates with the USDC’s partial pushback from the first paragraph.)