cryptocurrencies
The stablecoin fell as low as $0.87 as Circle broke the news that its reserves were with the collapsed lender
Sat 11 Mar 2023 17:03 GMT
The value of the world’s fifth-largest cryptocurrency, USD Coin (USDC), plunged to an all-time low on Saturday after Circle, the US firm behind the coin, revealed that $3.3 billion of the reserves backing it were at the Silicon Valley Bank were held.
USDC is a stablecoin – cryptocurrencies designed to maintain a stable value – USDC’s value is designed to mimic the dollar. But the coin broke its 1:1 dollar peg, falling as low as $0.87 on Saturday morning.
Government hits tech companies after Silicon Valley Bank UK collapse
Circle announced Friday that $3.3 billion of its $40 billion USDC reserves are being held at collapsed bank Silicon Valley Bank. But the impact of the collapse of the SVB is only just beginning to be understood.
California Gov. Gavin Newsom issued a statement Saturday that he is in contact with the White House and the US Treasury Department.
“Everyone works with FDIC [Federal Deposit Insurance Corporation] to stabilize the situation as quickly as possible to protect jobs, people’s livelihoods and the entire innovation ecosystem that has served as a tent pole for our economy,” he said.
Fears of a spreading contagion also materialized in the UK, where the SVB subsidiary was due to be declared insolvent. Executives from around 180 technology companies called Chancellor Jeremy Hunt to intervene in the crisis.
Separately, a newly formed, state-administered SVB entity called the Deposit Insurance National Bank of Santa Clara, or DINBSC, sent a letter to an estimated 8,500 SVB employees offering 45 days of employment, after which they would be fired, according to Bloomberg.
Silicon Valley Bank collapsed on Friday in the largest U.S. bank failure since the 2008 financial crisis, sending global markets into turmoil and stranding billions of dollars in corporate and investor ownership. Concerned depositors queued outside SVB branches hoping to withdraw funds in excess of the $250,000 guaranteed by Federal Bank regulations.
The mounting fallout followed reports that SVB had not appointed a chief risk officer in the months leading up to the collapse, while more than 90% of its more than $212 billion in deposits were uninsured.
For now, concerns about contagion to other parts of the financial system appeared limited to cryptocurrencies early Saturday.
But SVB, based in Santa Clara, California, holds deposits about a tenth the size of JPMorgan, the largest US bank. It collapsed abruptly after failing to raise money to meet demand for withdrawals after claiming to have sold about $21 billion worth of securities from its portfolio, resulting in a 1.8-pound loss billion in the first quarter.
Bloomberg estimates that SVB does business with nearly half of all U.S. venture capital-backed startups and 44% of U.S. venture-backed technology and healthcare companies that went public last year.
Those companies that need cheap cash and investor goodwill in their quest for a “unicorn” — a start-up worth billions but with little cash flow — have been hit hard by rising interest rates.
The Wall Street Journal noted Saturday that the SVB was burdened by using short-term money from depositors to invest in assets that couldn’t be quickly unloaded to cover customer withdrawals when funding for new depositors dried up.
SVB chief executive Greg Becker said in a letter to shareholders that the bank had been hit by “continuedly higher interest rates, pressures in public and private markets and increased cash burn from our customers”.
But none is potentially more vulnerable than the crypto business, which has already reeled from a broad drop in the value of its tokens and the bankruptcy of crypto exchange FTX that led to the arrest of CEO Sam Bankman-Fried on fraud charges.
questions and answers
What is a stable coin?
A stablecoin, as the name suggests, is a type of cryptocurrency intended to have a stable value, such as B. $1 per token. How they achieve this varies: the largest, like Tether and USD Coin, are effectively banks. They hold large reserves of cash, liquid assets and other investments and simply use these reserves to maintain a stable price.
Others, known as “algorithmic stablecoins,” are attempting the same thing, but with no reserves. They have been criticized for being effectively backed by Ponzi schemes, as they require steady inflows of money to ensure they don’t collapse.
Stablecoins are an important part of the cryptocurrency ecosystem. They offer investors a safer place to store capital without incurring the hassle of full withdrawals and allow assets to be denominated in conventional currencies rather than other highly volatile tokens.
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On Friday, Circle said in a tweet that it and USDC are “continuing as normal” while the company awaits clarity on what will happen to Silicon Valley Bank’s depositors.
Circle did not immediately respond to a request for comment on the dollar peg sent outside US business hours.
They are used in cryptocurrency trading and 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 is usually close to $1, making Saturday’s drop unprecedented. According to CoinGecko data, its previous all-time low was around $0.97 in 2018, although it fell just below $0.99 in 2022 when cryptocurrency markets were rocked by the collapse of crypto hedge fund Three Arrows Capital.
Traders have been wary of signs of contagion in the financial sector this week and beyond on issues for Silicon Valley Bank and crypto-focused Silvergate (SI.N), which this week announced plans to cease operations and voluntarily liquidate.
Boston-based Circle said last week it had moved a “small percentage” of USDC reserve deposits held at Silvergate to its other banking partners.
Cryptocurrency exchange Binance CEO said in a tweet on Friday that he has no exposure to Silicon Valley Bank, as does Tether CEO Paolo Ardoino.
Stablecoin issuer Paxos and crypto exchange Gemini also tweeted that they have no ties to the bank.
Portal contributed to this report
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