The fifth largest cryptocurrency by market value lost its peg to the dollar after its issuer announced that it had about 8.25% of its $40 billion reserves locked up at the failed Silicon Valley Bank.
The damage caused by the closure of Silicon Valley Bank, the second largest bank failure in US history, continues to take its toll.
This time, it is in the cryptocurrency industry, and it is about USDC, or USD Coin, a currency issued by the Circle Financial firm.
USDC is a stablecoin. In other words, it is a token that is tied to other assets, such as the dollar, in an effort to limit its volatility. Its value is not supposed to change: 1 USDC = $1.
This value is immutable. This is what attracts institutional investors who want to invest in cryptocurrencies but are afraid of exposing themselves to high market volatility.
USDC fell to 87.88 cents
Investors who put their money into stablecoins are confident that they will get the same amount when they sell or transfer them. Which is not the case for fiat currencies and other currencies like bitcoin, since their price moves according to different micro, macro and other factors.
This is no longer the case since March 11, because the USDC lost its peg to the dollar. The fifth cryptocurrency by market value fell as low as 87.8874 cents around 3:22 a.m. ET, about 13 cents below the $1 it should match, according to the data firm. CoinGecko. At the time of writing, 1 USDC was worth 95.01 cents, still almost 5 cents below $1.
The USDC stumbles because its issuer announced overnight that part of its reserves were in an account with Silicon Valley Bank.
“Following confirmation at the end of today that transfers initiated Thursday to clear balances had not yet been processed, $3.3bn of the ~$40bn USDC reserves remain at SVB,” Circle announced on Twitter.
The firm added: “Like other customers and depositors who have relied on SVB for banking services, Circle joins calls for the continuity of this major bank in the US economy and will follow the guidance provided by the state and federal regulators.
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The big risk for USDC is that if its holders panic because there are not enough reserves behind it, they may start liquidating their coins, sending the cryptocurrency crashing. This doomsday scenario happened to the UST stablecoin, or TerraUSD, last May.
Regulators abruptly shut down the bank on March 10, and the FDIC took control. The federal agency has immediately created a new entity that will begin operations on March 13.
By shutting it down, the Federal Deposit Insurance Corporation took control and is now the manager of $175 billion in customer deposits, including money from several startups and some of the biggest names in the world of technology.
The regulator also created a new entity, saying that unsecured depositors, ie SVB clients with more than $250,000 in their accounts, will not have access to their money for the time being. These clients are waiting for guidance on March 13.
Created in 1983, Silicon Valley Bank, which billed itself as a “partner in the innovation economy,” offered higher interest rates on deposits than its biggest rivals to attract customers. The company then invested the customers’ money in long-term Treasury bonds. and strong-yielding mortgage bonds.
This strategy had worked well in recent years. The bank’s deposits doubled to $102 billion at the end of 2020 from $49 billion in 2018. In 2021, deposits increased to $189.2 billion.
But everything turned upside down when the Federal Reserve started raising interest rates, making the existing bonds held by SVB less valuable. As a result, the bank had to sell the bonds at a discount to cover its customers’ withdrawals. By selling these bond positions, SVB had to take a significant loss of $1.8 billion.
Due to this loss, SVB suddenly announced that it needed to raise additional capital of $2.25 billion by issuing new common and convertible preferred shares. This decision caused panic and a bank run.
About $42 billion of deposits were withdrawn by the end of March 9, according to a regulatory document. As of the close of business that day, SVB had a negative cash balance of $958 million, according to the document.
