USDC, the fifth most valuable cryptocurrency in the market, just survived a hellish weekend. Shocked by the bankruptcy of Silicon Valley Bank (SVB), the digital currency has caused panic among investors…
A few days ago, USDC, the stablecoin issued by the Circle company with the support of the Coinbase platform, started experiencing serious disruptions. On the night of March 10 to 11, 2023, the cryptocurrency lost some of its value… which is very worrying for a stablecoin.
As a reminder, one stable coin is a cryptocurrency indexed to an asset that is considered tangible, usually a fiat currency or a precious metal such as gold. Currently most of stable coins are backed by the US dollar, which remains the most important currency internationally. In theory, the value of a stable currency must always match that of the dollar. It should not fluctuate like that of Bitcoin, Ether or any exchange.
This has not been the case for the USDC for several days now, the second stable currency the most important on the market, behind the USDT. The price of the 5th most valuable cryptocurrency in the world fell below $0.90, sparking a wave of panic throughout the ecosystem. This weekend, investors were unable to convert their USDC into real dollars without losing some of their money. This stall puts a strain on the trust of users, who are still traumatized by the brutal death of FTX, Celsius or UST.
The price of USDC over the past seven days, on CoinMarketCap
The situation of the USDC is somewhat reminiscent of that of the TSU. In May 2022, the stable coin of the Luna ecosystem, developed by Terra Labs, suddenly lost its parity with the dollar. The value of the UST collapsed in a matter of days. Nevertheless, UST and USDC are diametrically different. To ensure the stability of the UST’s value, Terra Labs relied on algorithms. By defaulting, they failed to maintain the parity of the token with the king dollar, ruining all holders.
Circle and Coinbase, in turn, guarantee the value of the USDC thanks to assets pledged as collateral. These can be cash, such as dollars, or Treasury bills issued by the US federal government. These assets are stored and managed by banks. This is where the problem lies.
US bank failures
The USDC stall was indeed caused by the earthquakes rocking the American banking system. In the space of a few days, several banks closed their doors, starting with Silvergate Bank, which is very close to the crypto asset sector. Soon after, the Silicon Valley Bank (SVB)the 18th largest US bank, has also bitten the dust.
This is the largest bank failure since the 2008 crisis. Founded in 1983, the bank has backed and financed several Silicon Valley giants. In particular, it extended credit to Apple in the late 1980s and invested large sums in companies such as Airbnb, SpaceX and Twitter. Before its closure, it funded nearly half of the tech startups in the United States.
Silicon Valley Bank was the victim ofMain flight. Fearing a chain reaction that would topple the banks, many customers withdrew their funds from their bank accounts. These mass withdrawals caused the downfall of the establishment. The bank was unable to repay all its customers at the same time.
These securities are currently inaccessible, temporarily engulfed in the banking debacle. This caused the USDC to break down early into the weekend. The destabilization of stable currency affected various decentralized financial services, including the Curve protocol and the DAI stablecoin. This, too, has lost its footing, in the wake of the USDC.
Back to stability?
Faced with panic in the financial markets, the Biden administration reacted quickly. She hurried to rescue the bank’s customers. All entities harmed by the bankruptcy will be fully compensated by US regulators. THE 175.4 billion deposits held by SVB will be borne by the United States.
Circle will therefore eventually recover the assets that supported it stable currency. Thanks to the intervention of the US government, the company committed stabilize the USDC price. On Monday, March 13, 2023, all USDC holders should be able to exchange their holdings for dollars without incurring the slightest loss. To store the necessary collateral, Circle turns to five other banks, including the Bank of New York Mellon (BNY Mellon).
A few days ago, USDC, the stablecoin issued by the Circle company with the support of the Coinbase platform, started experiencing serious disruptions. On the night of March 10 to 11, 2023, the cryptocurrency lost some of its value… which is very worrying for a stablecoin.
As a reminder, one stable coin is a cryptocurrency indexed to an asset that is considered tangible, usually a fiat currency or a precious metal such as gold. Currently most of stable coins are backed by the US dollar, which remains the most important currency internationally. In theory, the value of a stable currency must always match that of the dollar. It should not fluctuate like that of Bitcoin, Ether or any exchange.
The spectrum of UST
This has not been the case for the USDC for several days now, the second stable currency the most important on the market, behind the USDT. The price of the 5th most valuable cryptocurrency in the world fell below $0.90, sparking a wave of panic throughout the ecosystem. This weekend, investors were unable to convert their USDC into real dollars without losing some of their money. This stall puts a strain on the trust of users, who are still traumatized by the brutal death of FTX, Celsius or UST.
The price of USDC over the past seven days, on CoinMarketCap
The situation of the USDC is somewhat reminiscent of that of the TSU. In May 2022, the stable coin of the Luna ecosystem, developed by Terra Labs, suddenly lost its parity with the dollar. The value of the UST collapsed in a matter of days. Nevertheless, UST and USDC are diametrically different. To ensure the stability of the UST’s value, Terra Labs relied on algorithms. By defaulting, they failed to maintain the parity of the token with the king dollar, ruining all holders.
Circle and Coinbase, in turn, guarantee the value of the USDC thanks to assets pledged as collateral. These can be cash, such as dollars, or Treasury bills issued by the US federal government. These assets are stored and managed by banks. This is where the problem lies.
US bank failures
The USDC stall was indeed caused by the earthquakes rocking the American banking system. In the space of a few days, several banks closed their doors, starting with Silvergate Bank, which is very close to the crypto asset sector. Soon after, the Silicon Valley Bank (SVB)the 18th largest US bank, has also bitten the dust.
This is the largest bank failure since the 2008 crisis. Founded in 1983, the bank has backed and financed several Silicon Valley giants. In particular, it extended credit to Apple in the late 1980s and invested large sums in companies such as Airbnb, SpaceX and Twitter. Before its closure, it funded nearly half of the tech startups in the United States.
Silicon Valley Bank was the victim ofMain flight. Fearing a chain reaction that would topple the banks, many customers withdrew their funds from their bank accounts. These mass withdrawals caused the downfall of the establishment. The bank was unable to repay all its customers at the same time.
Then regulators stepped in to take control of the bank. As it turned out, some of the assets Circle had collateralized to stabilize the USDC were retained by Silicon Valley Bank. On the sidelines of the bankruptcy, USDC’s issuer confirmed that $3.3 billion was held by the bank at the time of the collapse. The company explains this in a press release “USDC is currently backed 77% ($32.4 billion) by US Treasury bonds and 23% ($9.7 billion) by cash held at various institutions”including Silicon Valley Bank.
These securities are currently inaccessible, temporarily engulfed in the banking debacle. This caused the USDC to break down early into the weekend. The destabilization of stable currency affected various decentralized financial services, including the Curve protocol and the DAI stablecoin. This, too, has lost its footing, in the wake of the USDC.
Back to stability?
Faced with panic in the financial markets, the Biden administration reacted quickly. She hurried to rescue the bank’s customers. All entities harmed by the bankruptcy will be fully compensated by US regulators. THE 175.4 billion deposits held by SVB will be borne by the United States.
Circle will therefore eventually recover the assets that supported it stable currency. Thanks to the intervention of the US government, the company committed stabilize the USDC price. On Monday, March 13, 2023, all USDC holders should be able to exchange their holdings for dollars without incurring the slightest loss. To store the necessary collateral, Circle turns to five other banks, including the Bank of New York Mellon (BNY Mellon).
In its press release, Circle also states that it maintains “USDC Trading and Clearing Accounts with Signature Bank”. Unfortunately for the start-up, this American bank has also gone bankrupt. Regulators have done close the Signature Bank for “protect the US economy”. It was the 21st largest bank in the United States, with $110 billion in assets under management. Coinbase, the exchange behind the USDC project, claims to have temporarily lost $240 million. Again, all lost funds will be refunded by the US federal state.
At the time of writing, the price of the USDC is very close to that of the dollar. One USDC is now worth $0.99, backing up Circle’s pledges. At this stage, everything points to the stable currency survived a major crisis. The repeated bankruptcies of the US banking system nevertheless continue to bode badly for the entire cryptocurrency market…