- Panic spread as many USDC holders sold their USDC below the peg.
- Tech and crypto firms were exposed to huge risks over the SVB collapse.
Crypto averted a major crisis – the USDC stablecoin regained its peg to the US dollar after panic over its reserves rocked the markets.
On Sunday, USDC issuer Circle revealed that it holds $3.3 billion of its reserves in the recently-bankrupt Silicon Valley Bank (SVB). That figure amounts to nearly 8% of its $40 billion reserves.
These revelations led the USDC to drop to an all-time low of $0.88, far below its intended peg of $1. USDC regained its peg on Monday after authorities revealed plans to limit the fallout from SVB’s collapse.
Treasury Secretary Announced Plans to Protect Depositors
Treasury Secretary Janet Yellen said that the government would reimburse all SVB depositors. However, she rejected the notion that the government would bail out the bank.
“Let me be clear that, during the financial crisis, there were investors and owners of systemic large banks that were bailed out,” said Yellen for CBS. “We are not going to do that again,” she added.
“But we are concerned about depositors, and we’re focused on trying to meet their needs,” Yellen added. That also means Circle, which is a major depositor of SVB bank.
“100% of deposits from SVB are secure and will be available at banking open tomorrow,” said Jeremy Allaire, co-founder and CEO of Circle, after US regulators decided to intervene.
SVB Crash Hits Crypto and Tech Hard
The collapse of the Silicon Valley Bank did not just impact USDC. Crypto and tech companies made up a majority of the bank’s clients. Circle CEO was among the many entrepreneurs that welcomed the intervention by US financial authorities.
“We were heartened to see the US government and financial regulators take crucial steps to mitigate risks extending from the fractional banking system,” Allaire said.
On Sunday, Angel investor Jason Calacanis called for US authorities to intervene on behalf of depositors.
Silicon Valley Bank is a crypto-friendly bank that benefitted enormously from the 2021 tech boom. When Federal Reserve started raising interest rates, unprofitable crypto, and tech companies suffered. These made up most of SVB’s clients, so the bank ran into financial trouble.
Panic Spreads – Holders Sell USDC at Loss
Despite USDC regaining its peg, the depegging was not without financial consequences. As panic spread, USDC holders cashed out in panic, contributing to selling pressure.
On-chain data showed outflows from USDC as investors sold off their holdings. Many investors sold USDC below $1 dollar, likely registering a loss on their purchase.
On Saturday, Circle burned $2.34 billion USDC due to stablecoin redemption while minting $366 million. Issuers like Circle send tokens to a burn address whenever users redeem them to ensure price stability. Similarly, Circle mints new tokens when tokens are in demand.
According to Nansen, redemptions slowed down significantly on Sunday, as Circle burned 649.3 million USDC and minted $16.7 million. Despite major selling pressure, USDC bounced back to around $0.97 after Circle announced it would defend its peg.
Withdrawal pressure slowed down further on Monday, as Circle burned $314 million while minting $407.8 million.
On the Flipside
- US authorities did not have to bail out all depositors. The standard insurance amount is $250,000 per depositor.
- The fallout from SVC could have created ripple effects across crypto and tech. The crypto market cap rose 12.46% after the announcement.
Why You Should Care
USDC’s panic demonstrated how much crypto is still interconnected with the traditional financial system.
Read about Circle’s stablecoin troubles:
Coinbase Staking Is Self-Custodial, Claims CEO: But What About USDC ‘Staking’?
Read about Binance’s troubles with BUSD:
Binance to Dump $1B BUSD for BTC, ETH, BNB… Here’s Why