Crypto Shaken as SVB Risk Depeg’s second largest stable coin

(Bloomberg) — The fallout from the Silicon Valley Bank failure reached further into crypto, loosening a key cog in the market that is supposed to be among the safest digital assets in the space.

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

On Saturday afternoon, CEO Jeremy Allaire provided further details about Circle̵[ads1]7;s exposure to the bank, saying in a statement on the company’s blog and in tweets that USDC was “100% secured by a combination of cash and US Treasuries” and will remain “redeemable 1 for 1” with US dollars. USDC’s price rose on the statement, trading around 97 cents as of 3:45 p.m. in New York.

“Specifically, the USDC is currently secured 77% ($32.4B) by US Treasuries (with maturities of three months or less), and 23% ($9.7B) by cash held at a number of institutions, of which SVB is just one” , according to the blog post. Circle’s Treasuries are held in custody at BNY Mellon, and are managed by BlackRock.

The cash reserves are spread over six banks, with the majority in BNY Mellon. Circle said it deposited $5.4 billion with BNY Mellon last week. The stablecoin firm had previously disclosed that the cash reserves were held at six banks, including BNY Mellon and Silicon Valley Bank, but had not provided details of the allocations to each.

USD Coin, or USDC, is an asset-backed stablecoin and a widely used plank of crypto markets. The token is intended to maintain a constant $1 value, fully backed by reserves of cash and short-dated government bonds.

USDC had a circulating supply of 39.7 billion tokens as of Saturday afternoon in New York, CoinGecko data shows. The bill, worth billions of dollars, had been redeemed by traders since Friday, some of whom swapped their holdings into Tether’s USDT stablecoin, data from Nansen and Curve Financial show.

As for Circle’s larger rival, top stablecoin Tether has held steady at or above $1. While Tether has previously come under scrutiny over its reserves, it said on Friday it had no exposure to SVB.

In earlier tweets, 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 that without a federal bailout it would have “broader implications for business, banking and entrepreneurs.”

Coinbase’s Step

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 Circles, are backed by reserves of cash and bonds. Investors often park funds in stablecoins when moving between crypto trades.

As the selloff in USDC worsened Friday night, US-based crypto exchange Coinbase Global Inc. said it will “temporarily pause” the conversion of USDC into US dollars over the weekend, and will resume on Monday when banks open. “Your assets remain safe and available for on-chain transmissions,” the crypto exchange said in a tweet from an official account.

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

Trading in USDC futures suggests optimism Circle will overcome its current squeeze. Data from research firm Coinglass shows 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 restoration of the coin’s dollar peg. When a funding rate is positive, long positions pay off short positions, reflecting a bullish sentiment from traders on the token’s prices.

“The USDC is going to be OK, it’s resilient and well-managed, with a capital structure stronger than most banks,” Oliver von Landsberg-Sadie, co-founder of BCB Group, which runs a payment network for crypto companies, said in an e- mail.

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

“Unless there is a concrete rescue plan this weekend, I think the markets will be ugly again next week,” Teong Hng, CEO of crypto investment firm Satori Research, said of SVB’s failure.

Crypto’s Misery

The crypto sector was already on a protracted rout that has hit $2 trillion worth of digital assets since November 2021, sparking a series of implosions such as the algorithmic TerraUSD stablecoin, Three Arrows Capital hedge fund and the FTX exchange.

The TerraUSD token – known as UST – tried to use a mix of algorithms and trading incentives involving a sister token, Luna, to hold its value. The $60 billion wipeout of this system intensified global regulatory scrutiny of stablecoins.

“I think the market priced USDC in panic like it priced USDT around the Luna collapse,” said Haohan Xu, CEO of Apifiny, an institutional trading platform. “It’s driven by Circle’s exposure at SVB plus Coinbase shutting down its USDC conversion feature.”

Trying to calm down

Crypto firms including Binance and Gemini took to Twitter on Friday to try to reassure their customers of any risk posed by SVB.

Changpeng Zhao, CEO of Binance, the largest digital asset exchange, tweeted that the firm has no exposure and that the funds are safe. Paxos Trust Co., issuer of the Pax Dollar, and crypto exchange Gemini said they have no relationship with the bank, according to statements on their official Twitter accounts.

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

–With assistance from Muyao Shen, Sunil Jagtiani, Olga Kharif and David Pan.

(Updates with a statement from Circle that starts in the third paragraph and updates prices)

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