Circle Internet Financial Ltd., the issuer of the USD Coin, a stablecoin pegged to the US dollar, has confirmed that it has $3.3 billion worth of its reserves at Silicon Valley Bank, which recently collapsed. This represents around 8% of the $40 billion in assets that back the token. In response, investors rapidly redeemed over $2 billion in USD Coin in the past 24 hours, causing its price to drop below $1 to 97 cents on Friday. The collapse of the bank led to Coinbase temporarily pausing conversions between USD Coin and the US dollar, and Binance suspending its auto-conversion from USD Coin to Binance USD.
Stablecoins’ role in cryptocurrency trading
Stablecoins like USD Coin have become increasingly important to cryptocurrency trading in recent years. As traders prefer to use stablecoins, which are less volatile, to trade in cryptocurrencies such as bitcoin, rather than using more volatile digital tokens or waiting days for trades made with government-issued currencies to settle. The collapse of Silicon Valley Bank has caused concern about the ability of stablecoin issuers to maintain the value of their tokens.
Also Read: Circle CEO Argues Stablecoins Should be Regulated by Banking Authorities
Circle’s response
Circle has responded to the situation by joining calls for regulatory guidance on continuity in the banking sector. It also stated that most of its USD Coin reserves are held in short-dated US Treasuries and assured customers that its majority assets were unaffected by the bank’s collapse. However, some crypto executives have questioned whether Circle has enough assets to cover its liabilities.
Other crypto companies have been affected by the collapse of Silicon Valley Bank, including crypto lender BlockFi, which had around $227 million in unprotected funds at the bank, according to a filing from the US Trustee, a unit at the Justice Department overseeing bankruptcies. However, Binance, Coinbase, Galaxy Digital, and Gemini all confirmed that they have no banking relationship with the bank.
TerraUSD’s demise
This is not the first time that a stablecoin has faced a crisis. In May 2022, TerraUSD, an algorithmic stablecoin, fell below its fixed value of $1, triggering a selloff that also dragged down its sister token luna to zero. The collapse wiped out $40 billion of market value and set off a series of crypto collapses in 2022. The incident has caused investor confidence in stablecoins to wane, making them anxious about any signs of depegging that could trigger a crash.
Source: WSJ
