One of the most important fundamentals of the cryptocurrency market appears to be on shaky ground, as stablecoin issuer Circle Internet Financial revealed that a significant portion of its reserves are locked up at the failed Silicon Valley Bank and the token struggled to maintain its status. parity with the dollar.
USDC is one of the so-called stablecoins, the value of which is pegged to one dollar. Stablecoin issuers such as Circle maintain the peg by holding reserves in safe assets such as Treasuries and bank deposits. Silicon Valley Bank was one of six banks Circle used, the company said. The company last week had withdrew the last of the reserves was held at a seventh, Silvergate Bank, shortly before that institution Announced would shut down operations.
Silicon Valley Bank "is a critical bank in the US economy and its failure, without a federal bailout, will have broader implications for business, banking and entrepreneurs," said Circle's chief strategy officer, Dante Disparte, in a tweet on Friday night, adding that Circle was "protecting #USDC from a black swan failure in the US banking system."
Circle had made a wire transfer request on Thursday before the FDIC takeover, the company sayingbut it was not processed.
Unlike previous crypto fights, such as the failures of crypto lenders like Celsius Network and Voyager Digital, the issue in USDC attacks what is supposed to be the “boring” part of cryptocurrencies. USDC and other stablecoins like Tether are most often used by cryptocurrency traders as a sort of parking spot between investments in more volatile tokens like Bitcoin. Investors can easily send stablecoins between exchanges or get in and out of coins almost instantly, without having to deal with banks that can sometimes take days to settle transactions.
Stablecoins keep the peg by promising to always allow investors to redeem tokens for traditional money deposited in a bank account, and regulators in the past have worried about how investors might react if some coins were found to lack the reservations they promised.
As of March 9, Circle said it had $43.5 billion in reserves backing $43.4 billion worth of USDC tokens, meaning any significant cut to its Silicon Valley Bank deposits would be more than enough to leave the token under water.
"Circle and USDC continue to operate as normal," a Circle spokesperson said on Friday.
It seems that some token investors are already moving quickly out of the USDC.
The token's price began to break away from the dollar on Friday afternoon, falling as much as 94 cents on the dollar, compared to rival Tether. It fell as low as 88 cents at 2:50 a.m. EST on Saturday, before recovering to around 91 cents later in the morning, according to CoinMarketCap.com. The token's total market capitalization as of 3 p.m. Friday had fallen by $5.9 billion to $37.7 billion, indicating that investors are redeeming large amounts of the token.
USDC, which also shares revenue with the trading platform
world coinbase
(ticker: COIN), had been widely seen as a more regulated alternative to Tether, the largest stablecoin at $73.7 billion. Any lack of faith in the coin could send more assets to Tether and contribute to volatility in the price of Bitcoin and other tokens, as investors lose one of the main mechanisms they used to trade.
The drop in USDC assets could also affect Coinbase, which, under an agreement with Circle, shares a portion of the revenue generated by USDC reserves. Coinbase Friday night saying was "temporarily halting" conversions between USDC and regular dollars over the weekend, citing increased activity and a need to wait for dollar transfers from banks that settle during normal business hours.
Coinbase in the fourth quarter earned $182.2 million in interest income, which includes USDC revenue, up from $7.6 million a year earlier, driven by rising rates. The firm in its annual report also said it had $861.1 million in USDC at the end of last year.
A Coinbase spokesperson declined to comment.
Write Joe Light at joe.light@barrons.com