Crypto exhales as USDC stablecoin rebounds towards peg after being roiled by SVB exposure
CRYPTO’S second-largest stablecoin rebounded towards its intended US$1 dollar peg, as issuer Circle Internet Financial pledged to cover any shortfall in US$3.3 billion of reverses held at collapsed Silicon Valley Bank (SVB).
USD Coin, a key plank in crypto markets, rose as high as US$1 and was trading at 98.2 cents as of 10.50 am on Sunday (Mar 12) in Tokyo. The coin had earlier fetched less than 85 US cents in a depeg that sent a shudder through digital assets.
Circle reiterated its stablecoin, also known as USDC, is fully backed by US$42.1 billion in cash and US Treasuries. The company said outbound transfers of the US$3.3 billion at SVB initiated as of Thursday had yet to settle, but expressed confidence in US regulatory efforts to manage the overall situation.
Circle said it was possible “SVB may not return 100 per cent and that any return might take some time”, in which case the firm “as required by law under stored-value money transmission regulation, will stand behind USDC and cover any shortfall using corporate resources, involving external capital if necessary”.
The volatility in USDC, which is meant to be one of the safest assets in crypto with a constant US$1 value, had spread to other stablecoins like Dai and Pax Dollar, but they also pushed closer to their pegs. Top stablecoin Tether or USDT – which had previously faced scrutiny over its reserves – said on Friday that it did not have exposure to SVB and had held firm at US$1 or above.
“There’s been two-sided flow in some just freaking out and wanting out of USDC,” said Spencer Hallarn, derivatives trader at investment firm GSR. Some investors moved to Tether “as a temporary hiding place” while on the other side, traders are “doing the math about likely impairment and value buying” USDC, he said.
Race for deposits
On Friday, SVB became the biggest US lender to fail in more than a decade. Deposits up to the Federal Deposit Insurance Corporation’s protected limit of US$250,000 are due to be available on Monday.
Regulators are racing to sell assets and make a portion of clients’ uninsured deposits available as soon as possible – the figures being floated behind the scenes for an initial payment range from 30 to 50 per cent, or more.
In earlier tweets, Circle’s chief strategy officer Dante Disparte described the fall of SVB as a “black swan failure” in the US financial system, saying that without a federal rescue plan there would be “broader implications for business, banking and entrepreneurs”.
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Stablecoins are supposed to hold a set value against another, highly liquid asset like the US dollar. Some, like Circle’s, are underpinned by reserves of cash and bonds. Investors often park funds in stablecoins as they move between crypto trades or access blockchain-based financial services.
‘Situation will rectify’
USDC has a circulating supply of about 41 billion tokens with a market value of roughly US$40 billion, CoinGecko data showed. Billions of dollars worth of the token have been redeemed by traders since Friday.
US-based crypto exchange Coinbase Global said it would be “temporarily pausing” the conversion of USDC into US dollars during the weekend, and would resume on Monday when banks open.
“It’s likely the USDC situation will rectify,” wrote Noelle Acheson, author of the Crypto Is Macro Now newsletter. “Monday should bring news on a solution for SVB depositors, and Circle will be able to recover at least some funds in the short term, while getting notes exchangeable for the rest.”
The swings in USDC had a knock-on effect on decentralised finance – or DeFi – applications, which let users trade, borrow and lend coins, and tend to rely heavily on trading pairs involving the stablecoin. On Saturday, members of the DeFi community which runs Dai proposed changes to the mechanism that helps keep its stablecoin pegged to US$1, to reduce exposure to USDC.
Crypto’s challenges
The crypto sector continues to reel from a prolonged rout that has knocked US$2 trillion off the value of digital assets since November 2021, precipitating a series of implosions such as the algorithmic TerraUSD stablecoin, the Three Arrows Capital hedge fund and the FTX exchange.
The TerraUSD token – known as UST – tried to use a mix of algorithms and trader incentives involving a sister token, Luna, to hold its value. The US$60 billion wipeout of that system intensified regulatory scrutiny of stablecoins.
“The market ‘panic priced’ USDC like it priced USDT around the Luna collapse,” said Haohan Xu, chief executive of Apifiny, an institutional trading platform.
Wider digital-asset markets are rounding off a week of losses. Bitcoin is down about 9 per cent over the period, the most since a 23 per cent weekly tumble in November amid the collapse of Sam Bankman-Fried’s FTX platform. BLOOMBERG
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