The value of the world’s fifth-largest cryptocurrency, USD Coin (USDC), fell 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 in Silicon Valley Bank. .
USDC is a stablecoin: cryptocurrencies designed to hold a stable value; USDC value is supposed to mimic the dollar. But the coin broke its 1:1 dollar peg and fell as low as $0.87 on Saturday morning.
Circle announced Friday that $3.3bn of its $40bn USDC reserves are being held at failed lender Silicon Valley Bank. But the effects of the collapse of SVB are only beginning to be understood.
California Gov. Gavin Newsom issued a statement Saturday saying he has been in communication with the White House and the US Treasury Department.
“Everyone is working with the 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 the pillar of our economy,” he said.
Fears of widespread contagion were also realized in the UK, where SVB’s subsidiary unit was due to be declared insolvent. Leaders of about 180 tech companies have called on Chancellor Jeremy Hunt to intervene in the crisis.
On the other hand, a newly formed, government-run SVB entity, called Banco Nacional de Seguro de Depósitos de Santa Clara, or DINBSC, sent a letter to some 8,500 SVB employees offering 45 days of employment after which they would be laid off, according to Bloomberg.
Silicon Valley Bank collapsed on Friday in the biggest US bank failure since the 2008 financial crisis, rocking global markets and stranding billions of dollars belonging to companies and investors. Worried depositors lined up outside SVB branches hoping to withdraw funds in excess of the $250,000 guaranteed by federal banking regulations.
The cumulative fallout followed reports that SVB had no chief risk officer in the months before the collapse, while more than 90% of its more than $212 billion in deposits were uninsured.
For now, concerns about contagion to other areas of the financial system appeared to be limited to cryptocurrencies early Saturday.
But SVB, based in Santa Clara, California, has deposits about a tenth the size of JPMorgan, the largest bank in the United States. He abruptly tanked after failing to raise money to meet the withdrawal demand after saying he had sold about $21 billion of securities from his portfolio, resulting in a $1.8 billion loss in the first quarter. .
Bloomberg estimated that SVB does business with nearly half of all US VC-backed startups and 44% of US VC-backed healthcare and technology companies that became public last year.
Those companies, which rely on cheap money and the goodwill of investors looking for a “unicorn” — a startup with a multibillion-dollar valuation but little cash flow — have been hit hard by the surge. of interest rates.
SVB, the Wall Street Journal noted on Saturdayit was burdened by the use of short-term money from depositors to invest in assets that could not be quickly unloaded to cover customer withdrawals when new depositor funds dried up.
SVB chief executive Greg Becker said in a letter to shareholders that the bank had been hit by “continuingly higher interest rates, pressured public and private markets and elevated levels of cash consumption by our clients.”
But none can be more vulnerable than the crypto business, already reeling from a broad collapse 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 stablecoin?
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A stablecoin, as the name suggests, is a type of cryptocurrency that is supposed to have a stable value, such as $1 per token. How they do this varies: the biggest ones, like Tether and USD Coin, are effectively banks. They have large reserves of cash, liquid assets, and other investments, and they simply use those reserves to maintain a stable price.
Others, known as “algorithmic stablecoins”, try to do the same but without reservations. They have been criticized for being effectively backed by Ponzi schemes, as they require continuous cash inflows to ensure they do not collapse.
Stablecoins are an important part of the cryptocurrency ecosystem. They provide a safer place for investors to store capital without going through the hassle of getting paid out in full, and they allow assets to be denominated in conventional currency, rather than other extremely volatile tokens.
On Friday, Circle said in a tweet that he and USDC “continue to operate as normal” while the firm awaits clarity on what will happen to Silicon Valley Bank depositors.
Circle did not immediately respond to a request for comment on the dollar peg sent outside of US business hours.
Used in cryptocurrency trading, they have increased in value in recent years. USDC is the second largest stablecoin with a market capitalization of $37 billion. The largest, Tether, has a market capitalization of $72 billion, according to CoinGecko.
The USDC price is generally holding close to $1, making Saturday’s drop unprecedented. According to CoinGecko data, its previous all-time low was around $0.97 in 2018, though in 2022 it fell to just below $0.99 as cryptocurrency markets were hit by the crypto hedge fund crash. Capital of the three arrows.
Traders have been on guard this week for signs of contagion in the financial sector and beyond the troubles at Silicon Valley Bank and crypto-focused Silvergate. (BREAST)what this week plans revealed to liquidate operations and liquidate voluntarily.
based in boston Circle it said last week that it had moved a “small percentage” of the USDC reserve deposits held at Silvergate to its other banking partners.
The CEO of the cryptocurrency exchange Binance said in a tweet Friday that he had no exposure to Silicon Valley Bank, as did Tie Executive President Paolo Ardoino.
Stablecoin issuer Paxos and cryptocurrency exchange Gemini also tweeted that they have no relationship with the bank.
Reuters contributed to this report
