USDC Stablecoin Depeg & SVB Collapse Explained
USDC, the world's second-largest stabelcoin breaks its dollar peg after the Silicon Valley Bank Collapse, read to know more.
15 MAR 2023, 5 min read
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The crypto industry was just picking up from the Terra/Luna depeg and the sudden collapse of the FTX exchange last year, but the recent event of the USDC, a stablecoin, losing its holding to the US dollar exacerbated the plight of the industry.

USDC, the world’s second-largest stablecoin pegged to the US Dollar, has been making headlines after its recent depegging event where the value of the stablecoin slipped below the $1 mark. Circle’s USDC stablecoin lost its value and hit a record low on March 11, 2023, as the company disclosed that nearly 8% of its $40 billion reserves were held with the troubled Silicon Valley Bank.

What exactly led to the Silicon Valley Bank (SVB) collapse?

SVB invested heavily in technology stocks which showed a downward trend in the last year, causing SVB to register massive losses. Secondly, SVB only kept a small portion of its deposits as cash and reinvested the rest in long-term bonds such as Treasury which were meant to provide steady returns to the bank. However, these investments were good only when the interest rates were low.

The Federal Reserve started raising interest rates to combat the rapid inflation that resulted in lower returns on bonds for SVB as bond prices move inversely with interest rates.

The news caused the customers of SVB to initiate the mass withdrawal of funds (known as the bank run). A staggering $42 billion of deposits were withdrawn on 7 March 2023, according to a California regulatory filing. SVB had a negative cash balance of $958 million by the end of the day as per the filing.

SVB had to sell some of its investments at a steep discount to meet the withdrawal demands. Eventually, SVB was pushed into not being able to fulfill the withdrawal orders. Once the free fall started, the bank started collapsing, putting $175 billion in customer deposits at risk. Touted as the go-to-bank for the start-up world, the SVB collapse affected many companies including one of the largest crypto companies, Circle which issues USDC stablecoin.

Read more: Ethereum Shanghai Upgrade

Stablecoin USDC breaks the dollar peg after Silicon Valley Bank Collapse

On Friday, 10 March 2023, USDC stablecoin issuer Circle announced that the company used SVB, which was shut down earlier on Friday by the regulators, as one of the six banking partners for managing its USDC cash reserves. Post the announcement, concerned investors started redeeming over $1 billion of USDC tokens, which led to the USDC stablecoin depegging and losing its $1 mark on several exchanges. As a result, USDC stablecoin collapsed and dropped as low as $0.87.

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Stablecoins are designed to provide stability to the crypto world and should ideally remain pegged to $1 but USDC went into a freefall on Friday, falling from $1 to $0.93 as per the data on CoinGecko, shaking the entire industry. The last time USDC fell to such low levels was in May 2019, when the stablecoin fell to $0.89.

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Source: CoinMarket Cap

Undisclosed Cash Reserves Found with Silicon Valley Bank.

USDC, the second-largest stablecoin, held an undisclosed part of its $9.8 billion cash reserves with Silicon Valley Bank. The market cap of USDC fell from $43 billion to $36 billion after the announcement of the closure of the Silicon Valley Bank. Silicon Valley Bank was one of the six banks Circle uses for managing 25% of its USDC reserves.

Finally, the company revealed that it held $3.3 billion worth of cash backing USDC with the Silicon Valley Bank. The news sent shockwaves to the entire crypto industry.

Major Crypto Exchanges Suspended USDC conversions

As the news broke that Circle held $3.3 billion in cash deposits (which accounted for over 8% of the total reserves backing USDT) with Silicon Valley Bank (SVB), which shut earlier that day, there was panic amongst investors to liquidate their USDC holdings.  

Top crypto exchanges such as Binance and Coinbase announced that they would temporarily suspend USDC conversions as a risk-assessment measure.

Other stablecoins depegged too

Post the SVB crisis, the USDC depegging event had a contagion effect on the entire crypto industry as the prices started collapsing. Algorithmic stablecoin DAI depegged and hit its all-time low of $0.88 as the stablecoin is collateralized by holdings from MakerDAO, which include USDC. Meanwhile, USDD, a stablecoin by Tron was also affected which was down to 93 cents. However, Tether, the world’s largest stablecoin remained pegged at $1.

However, another blow to the industry came in on Sunday when New York-based Signature Bank, holding a number of crypto clients, was shut down by the US regulators. Federal Depository Insurance Corporation (FDIC) took receivership of the bank. This was the third bank collapse in under a week, following Silvergate Bank's liquidation and Silicon Valley Bank's shutdown.

Federal Deposit Insurance Corp announces it will protect SVB depositors

As the fate of the SVB was being decided by the US authorities, Circle announced that it “will stand behind USDC and cover any shortfall using corporate resources, involving external capital if necessary.” However, there was cheer in the market as the Federal Deposit Insurance Corp (FDIC) announced that it would safeguard all deposits including uninsured deposits, and all the affected accounts would receive their deposits back Monday, 13 March 2023 onwards.

As the news came in that FDIC would be taking over and covering the depositors, the USDC started moving upwards and was trading close to 90 cents on Saturday. Traders started betting big on the recovery, buying USDC cheaper with the potential of a 10% return as the stablecoin regains its peg.

DEXs record all-time-high trading volumes

Decentralized exchanges (DEX) such as Uniswap and Curve recorded all-time-high high trading volumes over the weekend as traders exchanged token holdings, especially USDC.

Over $12 billion in trading volume was processed on Uniswap over a 24-hour period from Saturday to Sunday. DEXs leverage smart contracts instead of intermediaries for providing financial services such as trading, lending, or borrowing to users. Curve, a stablecoin swapping tool, also recorded nearly $8 billion in trading volume.

Crypto Industry regains $1 trillion Market Cap

The broader crypto market rallied on Monday as regulators stepped in. The Bitcoin price rose on account of the rescue plan by FDIC, rising by more than 4% on Saturday. The growth in the market can also be attributed to inflation easing in the U.S. as the CPI report indicated that  inflation held steady in February 2023. Easing inflation is good news for the economy as it could result in the Federal Reserve slowing interest rate hikes. Bitcoin is currently trading above $24,000, and USDC is trading close to $1. The crypto market cap has regained the $1 trillion mark and the altcoins are also trading upwards.

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