Crypto shaken as SVB Risk deprecates second largest stablecoin

(Bloomberg) – The ramifications of Silicon Valley Bank’s failure reached further into crypto, unbalancing a key cog in the market said to be among the most secure digital assets in the space.

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The second-largest stablecoin, USD Coin, was trading at just 81.5 cents as investors raised exposure from its issuer, Circle Internet Financial Ltd. at Silicon Valley Bank, which had just collapsed in one of the biggest failures in US banking history. Late Friday, after hours of silence, Circle announced that $3.3 billion of its roughly $40 billion stash of reserves was being held at the failed bank.

On Saturday afternoon, Chief Executive Officer Jeremy Allaire provided additional details about Circle’s involvement with the bank, saying in a statement on the company’s blog and tweets that USDC is “100% collateralised with a combination of cash and US Treasuries.” and “redeemable 1 for 1” with the US dollar. The USDC said it recovered and was trading at 97 cents as of 3:45 p.m. in New York.

“Specifically, USDC is currently 77% ($32.4 billion) backed by US Treasury bills (with a maturity of three months or less) and 23% ($9.7 billion) by cash held in a variety of institutions, of which SVB is just one,” reads the blog post. Circle’s treasuries are held at BNY Mellon and managed by BlackRock.

Much of his cash reserves are held with BNY Mellon; Circle said it deposited $5.4 billion there last week. The stablecoin firm previously announced that its cash reserves are held at six banks, including BNY Mellon and Silicon Valley Bank, but did not provide specific dollar amounts for each allocation before Friday.

USD Coin, or USDC, is an asset-backed stablecoin and a widely used platform for crypto markets. The token is said to hold a constant value of $1, fully backed by cash reserves and short-term government bonds.

USDC had 39.7 billion tokens in circulation as of Saturday afternoon in New York, data from CoinGecko shows. The billion-dollar token has been redeemed since Friday by traders, 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 at or above $1. While Tether previously faced a review of its reserves, it said on Friday it had no exposure to SVB.

In previous tweets, Circle’s chief strategy officer Dante Disparte described the collapse of Silicon Valley Bank as a “black swan failure” in the US financial system, saying that without a government bailout plan, there will be “further implications for businesses, banks and entrepreneurs.” would. ”

Coinbase’s move

Stablecoins like USDC are designed to hold a set value against another, highly liquid asset like the US dollar. They come in a variety of forms and some, like Circle’s, are backed by reserves of cash and bonds. Investors often park funds in stablecoins when moving between crypto trades.

As USDC’s sell-off worsened on Friday night, U.S.-based crypto exchange Coinbase Global Inc. said it would “temporarily suspend” USDC-to-US dollar conversions over the weekend and resume on Monday when banks open. “Your assets remain safe and available for on-chain shipments,” 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 on-chain,” any issuance and redemption of the stablecoin “is constrained by the working hours of the US banking system.”

Trading USDC futures raises optimism that Circle will emerge from its current crisis. Data from research firm Coinglass shows that funding rates for USDC contracts on at least one exchange turned positive on Saturday morning in New York, suggesting traders are betting on a recovery in the coin’s dollar peg. When a funding rate is positive, long positions pay for short positions, reflecting bullish sentiment among traders on the token’s prices.

“USDC will be fine, it’s resilient and well-managed, with a capital structure stronger than most banks,” said Oliver von Landsberg-Sadie, co-founder of BCB Group, which operates a payments network for crypto businesses, in an email .

Meanwhile, the decline in USDC had a domino effect on DeFi applications that allowed users to trade, borrow, and lend coins, and typically rely heavily on stablecoin trading pairs. On Saturday, members of the DeFi community that powers DAI proposed changes to the mechanism that helps keep its stablecoin pegged to $1 in a way that would reduce its exposure to USDC.

“If there is no concrete bailout plan this weekend, I think the markets will be ugly again next week,” Teong Hng, chief executive officer of crypto investment firm Satori Research, said of the SVB failure.

Krypto’s suffering

The crypto sector has already been hit by an ongoing defeat that has depreciated $2 trillion in the value of digital assets since November 2021 and sparked a series of implosions such as the TerraUSD algorithmic stablecoin, the Three Arrows Capital hedge fund and the FTX exchange .

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

“I think the market panicked the USDC the way it priced the USDT around the Luna collapse,” said Haohan Xu, chief executive officer of Apifiny, an institutional trading platform. “It’s driven by Circle’s engagement with SVB and Coinbase closing their USDC conversion facility.”

try to calm down

Crypto firms like Binance and Gemini took to Twitter on Friday to reassure their clients about any risks posed by SVB.

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

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

–Assisted by Muyao Shen, Sunil Jagtiani, Olga Kharif, David Pan and Shiyin Chen.

(Updates with statement from Circle beginning in third paragraph and update to prices)

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