Crypto Shaken As Risk SVB Depegs Second Largest Stablecoin

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(Bloomberg) — The fallout from the failure of Silicon Valley Bank has reached further into crypto, dismantling a key market cog that’s supposed to be among the most secure digital assets in the space.

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The second-largest stablecoin, USD Coin, was trading as low as 81.5 cents as investors digested exposure to its issuer Circle Internet Financial Ltd. to Silicon Valley Bank, which had just collapsed in one of the greatest failures in American banking history. Late Friday, after hours of silence, Circle revealed that $3.3 billion of its stockpile of about $40 billion in reserves was held by the bankrupt bank.

On Saturday afternoon, Chief Executive Jeremy Allaire provided additional details about Circle’s exposure to the bank, saying in a statement on the company’s blog and in tweets that USDC was “100% backed by a combination of cash and U.S. Treasuries” and would remain “1-for-1” exchangeable with the U.S. dollar. USDC price rallied on the statement, trading around 97 cents at 3:45 p.m. New York .

“Specifically, USDC is currently 77% ($32.4 billion) collateralized by U.S. Treasuries (with a maturity period of three months or less) and 23% ($9.7 billion ) by cash held in various institutions, of which SVB is just one. ,” according to the blog post. Circle’s treasuries are held by BNY Mellon and managed by BlackRock.

The majority of its cash reserves are held at BNY Mellon; Circle said it deposited $5.4 billion there last week. The stablecoin company previously disclosed that its cash reserves were held at six banks, including BNY Mellon and Silicon Valley Bank, but by Friday it had not provided specific dollar amounts for individual allocations.

The story continues

USD Coin, or USDC, is an asset-backed stablecoin and board widely used in crypto markets. The token is intended to hold a constant value of $1, fully backed by cash reserves and short-term treasury bills.

USDC had a circulating supply of 39.7 billion tokens as of Saturday afternoon in New York, according to data from CoinGecko. Billions of dollars of the token had been redeemed by traders since Friday, some of whom swapped their holdings for Tether’s stablecoin USDT, according to data from Nansen and Curve Financial.

As for Circle’s biggest rival, the best stablecoin Tether held its own at $1 or more. While Tether has already come under scrutiny for its reserves, it said on Friday that it has no exposure to SVB.

In previous tweets, Circle 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 there is would have “wider implications for businesses, banks and entrepreneurs.”

The Coinbase Stage

Stablecoins like USDC are meant to hold a fixed value against another highly liquid asset like the US dollar. They come in a variety of forms and some, like Circle’s, are backed by cash and bond reserves. Investors often place funds in stablecoins when moving between crypto transactions.

As USDC selling worsened on Friday evening, US-based crypto exchange Coinbase Global Inc. said it would “temporarily suspend” the conversion of USDC into US dollars over the weekend. end and that it would resume on Monday when the banks open. “Your assets remain safe and available for on-chain sends,” the crypto exchange said in a tweet from an official account.

In its Saturday statement, Circle acknowledged that while “USDC can be used 24/7/365 on-chain,” any issuance and redemption of the stablecoin “is limited by the working hours of the US banking system.”

USDC futures trading suggests Circle optimism will overcome its current pinch. Data from research firm Coinglass shows that USDC contract funding rates on at least one exchange turned positive on Saturday morning in New York, indicating traders are betting on a resumption of the coin’s dollar peg. When a funding rate is positive, long positions pay for short positions, reflecting bullish sentiment among traders on token prices.

“USDC will do well, it’s resilient and well managed, with a stronger capital structure than most banks,” said Oliver von Landsberg-Sadie, co-founder of BCB Group, which operates a payment network for crypto companies. E-mail.

In the meantime, the fall of USDC has had a ripple effect on DeFi apps that allow users to trade, borrow and lend coins and which tend to rely heavily on pairs. trading involving the stablecoin. On Saturday, members of the DeFi community that runs DAI proposed changes to the mechanism that helps keep its stablecoin pegged at $1 in a way that would reduce its exposure to USDC.

“Unless there is a concrete bailout this weekend, I think the markets will be lousy again next week,” said Teong Hng, managing director of crypto investment firm Satori Research. , about the failure of SVB.

Crypto’s Woes

The crypto sector was already reeling from a protracted rout that has seen the value of digital assets plummet by $2 trillion since November 2021, precipitating a series of implosions such as algorithmic stablecoin TerraUSD, hedge fund Three Arrows Capital and the FTX exchange.

The TerraUSD token – known as UST – tried to use a mix of algorithms and trader incentives involving sister token Luna to retain its value. The $60 billion wipe from this system has heightened global regulatory scrutiny of stablecoins.

“I think the market priced USDC the way it priced USDT around the Luna crash,” said Haohan Xu, managing director of Apifiny, an institutional trading platform. “He’s driven by Circle’s exposure to SVB and Coinbase shutting down its USDC conversion feature.”

try to reassure

On Friday, crypto firms such as Binance and Gemini took to Twitter in an attempt to reassure customers of the risks posed by SVB.

Changpeng Zhao, CEO of Binance, the largest digital asset exchange, tweeted that the company was not exposed and its funds were safe. Paxos Trust Co., issuer of Pax Dollar, and crypto exchange Gemini said they have no relationship with the bank, according to statements on their official Twitter accounts.

In contrast, bankrupt crypto lender BlockFi has around $227 million in an account at SVB, according to a court filing.

–With help from Muyao Shen, Sunil Jagtiani, Olga Kharif, David Pan and Shiyin Chen.

(Updates with Circle’s statement starting at third paragraph and updating pricing)

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