The second-largest stablecoin fell from its expected peg of $1, trading as low as 81.5 cents as investors reacted to issuer Circle Internet Financial Ltd.'s exposure to the crashed bank.
USD Coin, or USDC, is an asset-backed stablecoin and widely used crypto board. markets. The token is intended to have a constant value of $1, fully backed by cash reserves and short-term Treasury bonds. But on Friday night, Circle revealed that $3.3 billion of its roughly $40 billion reserve stash is being held at Silicon Valley Bank, which just became one of the largest US bank failures in recent history.
Regulators seized the bank on Friday and investors await more clarity on the return of deposits. In that vacuum, the USDC fell below $1 and was trading around 91 cents at 8:45 am in New York. Smaller stablecoins like DAI, which is sometimes seen as a proxy for USDC, and Pax Dollar also fell from their pegs. DAI is the fourth largest stablecoin by circulation and one of the most widely used tokens in decentralized finance.
โDAI is not a safe haven in this regard because much of it is guaranteed directly by USDC,โ Michael Egorov, founder of decentralized exchange Curve Finance, said in an email. USDC had a circulating supply of around 40 billion tokens as of Saturday. tomorrow in New York, CoinGecko data shows. $2 billion net of USDC was redeemed in the last 24 hours, according to blockchain research firm Nansen.
As for Circle's biggest rival, Tether, the top stablecoin, has been holding its own at $1 or more. While Tether has previously faced scrutiny over its reserves, it said on Friday that it had no exposure to SVBs.
The broader crypto markets are having a painful week and on Saturday they were on the defensive: Bitcoin wavered between gains and losses, while smaller tokens like Solana and Avalanche were in the red.
Circle's chief strategy officer, Dante Disparte, described the fall of Silicon Valley Bank as a "black swan failure" in the US financial system, saying in a tweet that without a federal bailout there would be "higher implications." broad for companies, banks and entrepreneurs".
Coinbase pass
Stablecoins like USDC are meant to hold a fixed value versus a highly liquid one. asset like the US dollar. They come in a variety of forms and some, like Circle's, are backed by cash reserves and bonds. Investors often deposit funds into stablecoins as they move between crypto trades.
As the USDC sell-off worsened late Friday, US-based cryptocurrency exchange Coinbase Global Inc. said it would "temporarily halt" the conversion of USDC to US dollars over the weekend and that it would resume on Monday when banks open. โYour assets remain safe and available for on-chain shipments,โ the crypto exchange said in a tweet from an official account.
Despite the turmoil, some see Circle regaining its footing. โUSDC is going to be fine, it's resilient and well managed, with a capital stronger structure than most banks," Oliver von Landsberg-Sadie, co-founder of BCB Group, who runs a pay network for crypto companies, he said in an email.
USDC futures trading also suggests optimism Circle will overcome its current predicament. Data from research firm Coinglass shows that funding rates for USDC contracts on at least one exchange turned positive as of Saturday morning in New York, indicating that traders are betting on a recovery from the parity with the dollar of the currency. When a funding rate is positive, long positions pay off short positions, reflecting bullish trader sentiment on token prices.
Meanwhile, the USDC crash has had a ripple effect on DeFi applications that allow users to trade, borrow and lend currencies and which tend to rely heavily on trading pairs involving the stablecoin. On Saturday, members of the DeFi community that manages DAI proposed changes to the mechanism that helps keep their stablecoin pegged to $1 in a way that would reduce their exposure to USDC.
โUnless there is a concrete bailout this weekend, I think the markets will be ugly again next week,โ Teong Hng, chief executive of crypto investment firm Satori Research, said of SVB's failure.
Crypto issues
The cryptocurrency sector was already reeling from a protracted rout that wiped out $2 trillion worth of digital assets as of November 2021, precipitating a series of implosions like algorithmic stablecoin TerraUSD, hedge fund Three Arrows Capital and the FTX exchange.
The TerraUSD token, known as UST, tried to use a combination of algorithms and trading incentives involving a sister token, Luna, to maintain its value. The removal of $60 billion from that system intensified global regulatory scrutiny of stablecoins.
โI think the market 'panic priced' USDC as it did USDT around the Luna collapse,โ said Haohan Xu, chief executive officer of Apifiny, an institutional trading platform. "It's driven by Circle's exposure to SVB plus Coinbase shutting down its USDC conversion feature."
trying to reassure
Crypto firms including Binance and Gemini took to Twitter on Friday to try to reassure their clients about the risks posed by the failed bank.
Changpeng Zhao, CEO of Binance, the largest digital asset exchange, tweeted that the company has no exposure and its funds are safe. Paxos Trust Co., the issuer of Pax Dollar, and cryptocurrency exchange Gemini said they have no relationship with the bank, according to statements on their official Twitter accounts.
By contrast, bankrupt crypto lender BlockFi has around $227 million in an account at the failed bank, according to a court filing.
