Silicon Valley Bank’s (SVB) crisis affected USD Coin (USDC), which lost its peg to the U.S. dollar. The destabilization of USDC hit the entire stablecoin ecosystem, triggering a massive sell-off.
On Saturday, March 11, Circle, the USDC stablecoin issuer, announced that it had failed to withdraw $3.3 billion from its Silicon Valley Bank accounts. This news triggered a FUD effect and caused the dollar-backed stablecoin to lose its peg.
Circle’s latest proof-of-reserves audit showed that about 20% of its assets were held at several financial institutions, including SVB and the recently bankrupted Silvergate. According to Dante Disparte, Head of Global Policy at Circle, the company began protecting USDC “from a black swan failure in the U.S. banking system.”
Consequently, the stablecoin depegged from the U.S. dollar. USDC’s price fell to $0.88 on March 11, CoinMarketCap reported. Immediately thereafter, Coinbase announced a temporary suspension of “USDC:USD conversions,” and later Binance “temporarily suspended auto-conversion of USDC to BUSD,” explaining its actions as “a normal risk-management procedural step.”
USDC’s depegging from the U.S. dollar had an immediate effect on the entire stablecoin ecosystem, as issuers of some stablecoins held reserves to secure them in USDC. For example, Statista reports that DAI is backed by $8.52 billion in crypto, more than 50% of which is in USDC. Therefore, due to USDC’s depegging on March 11, the price of DAI went down to $0.897, as reported by CoinMarketCap. Algorithmic stablecoins also faced pressure — the value of USD Digital (USDD) dipped to $0.926 and FRAX dropped to $0.885.
It should be noted that USDC’s problems didn’t affect prices of other major stablecoins. USDT and BUSD still have a 1:1 peg to the dollar. This is mainly due to the fact that rumors about Circle’s possible problems provoked a massive sell-off of USDC tokens, which were exchanged for other stablecoins.
The Curve Finance team recorded an all-time high in daily trading volume on March 11 — $5.67 billion. Curve 3pool users were impacted by the FUD and began actively exchanging USDC for USDT. Justin Sun, Founder of Tron, also converted his funds to other stablecoins. He exchanged 8.2 million USDC for DAI. A total of 118.73 million USDC was withdrawn from wallets associated with IOSG Ventures. They were exchanged for 105.67 million USDT and 2,756 ETH ($3.98 million).
USDC’s depegging hit crypto whales, they reported significant losses as well. Du Jun, Co-Founder of cryptocurrency exchange Huobi Global, confirmed that his personal losses in stocks and deposits and those of his business partners totaled over $1 billion.
According to a blog post, the Circle team plans to use “corporate resources” to cover its reserve shortfall after Silicon Valley Bank’s (SVB) shutdown. Circle CEO Jeremy Allaire said the company would temporarily “be relying on settlements through BNY Mellon” and was looking for a new banking partner ready to transact “as soon as tomorrow.”
As U.S. banks opened on Monday, March 13, USDC liquidity operations “resumed as normal.” USDC recovered its peg to the U.S. dollar and, according to CoinMarketCap at 11:00 (GMT+2), is trading at $0.99.
Circle didn’t confirm any reserves in Silvergate when rumors of its possible bankruptcy began circulating in the community. After Silicon Valley Bank was forced to shut down, it turned out that the company had been storing ~$40 billion as USDC collateral.
