Early on Saturday, Stablecoin USD Coin (USDC) lost its 1:1 dollar peg and dropped as low as $0.88 after Circle, the stablecoin’s issuer, disclosed that some of the assets supporting it were stored at the struggling Silicon Valley Bank (SVB).
The USDC stablecoin’s price dropped by almost 10% when the cryptocurrency business revealed that it had $3.3 billion of its $40 billion in reserves at the bank, prompting investors to immediately withdraw their funds from the crypto asset.
As USDC fell to an all-time low over the weekend, it began to recover on Sunday night, trading at $0.991021 on CoinGecko at press time.
USDC’s de-pegging also affected other stablecoins, including DAI, USD Digital (USDD), and Fractional Algorithmic Stablecoin (FRAX).
DAI lost 7.4% of its value, de-pegging to $0.897 because about 51% of its assets were in the USDC. FRAX also dipped to $0.885. Fortunately for Tether (USDT), it was able to maintain its peg and even increase to about $1.08 amid the fiasco.
Can USDC lose its dollar peg again?
Investors and traders may wonder, despite the relatively positive news that has emerged since Sunday, “Will USDC lose its peg to the dollar again in the next few days?” Market players are specifically afraid that the coin may end up like terra’s UST.
First of all, the FDIC has already been given permission to take measures to safeguard Silicon Valley Bank depositors, according to the American Federal Reserve. The government offered to backstop all depositors without using taxpayer funds when it announced emergency steps on Sunday night to prevent the bank’s collapse from spreading.
This was most likely due to the 3,500 CEOs and founders who signed a petition over the weekend pleading with Janet Yellen, the US secretary of the treasury, and regulators to support depositors and warn that over 100,000 jobs may be in trouble.
Meanwhile, Circle also disclosed that USDC stablecoin is 100% collateralized with a combination of cash and US Treasury bonds. It asserted that it is currently collateralized 77% ($32.4B) with US Treasury Bills and 23% ($9.7B) with cash held at a “variety of institutions,” of which SVB is only one.
“Silicon Valley Bank is one of six banking partners Circle uses for managing the ~25% portion of USDC reserves held in cash,” Circle maintained in a tweet on March 11.
Silicon Valley Bank is one of six banking partners Circle uses for managing the ~25% portion of USDC reserves held in cash. While we await clarity on how the FDIC receivership of SVB will impact its depositors, Circle & USDC continue to operate normally.https://t.co/NU82jnajjY
— Circle (@circle) March 10, 2023
Circle will cover any deficit with corporate funds.
The good news is that Circle has additional reserves beyond those trapped with SVB, so this problem is unlikely to cause USDC to drop to zero or even lower in the coming days. As only roughly 8% of the reserves were affected, the USDC stablecoin is likely to recover soon and finally keep up its dollar parity fully.
Remarkably, Circle stated that it is optimistic that its $3.3 billion will be recovered from the FDIC’s acquisition of the failing bank. Even though it’s possible that SVB won’t return 100% and that any return could take some time, Circle has pledged to cover up any shortfall using internal resources, possibly even with the help of outside funds.