crypto: after SVB and the depeg of USD Coin

Before the Silicon Valley Bank (SVB) crisis, the stablecoin USD Coin had captured about 70% of the on-chain transaction volume on Ethereum, indicating its popularity among the DeFi and NFT community.

Now, after a careful report by Chainalysys, here is what the on-chain data shows about crypto’s reaction to the demise of Silicon Valley Bank and the depegging of USDC.

Crypto complications: USD Coin and the money deposited with SVB

Last week saw three medium-sized banks fail, sparking fears of a larger, panic-induced bank run.

Although these fears remain, it appears that depositors at the three banks closed over the weekend, Silicon Valley Bank (SVB), Silvergate Bank, and Signature Bank, will be able to access their funds.

All three bank failures have significant implications for cryptocurrencies. USDC issuer Circle had $3.3 billion deposited with Silicon Valley Bank, which accounted for about 8% of the dollars backing USDC.

Concerns about those deposits prompted USDC to lose its peg over the weekend, and although the peg has since been regained, the incident raises questions about off-chain counterparty risk for issuers of stablecoins and other crypto assets.

The closures of Silvergate and Signature are arguably even more significant, as the two were among the largest US providers of banking services to cryptocurrency companies.

While this does not take the cryptocurrency industry back to the stone age of the early 2010s, when it was virtually impossible to obtain banking partners, these closures significantly limit US banking options in the space and could make it more difficult for cryptocurrencies to enable.

USD Coin loses peg to dollar after SVB

But what happened over the weekend? We see that cryptocurrencies escaped custody platforms as USDC became unbalanced due to the failure of Silicon Valley Bank (SVB).

The latter provided business banking services to a huge number of tech startups backed by venture capital.

When word got out that the bank might be insolvent, as government bonds purchased in recent years were now drastically declining in value following recent interest rate increases, many of these companies moved to withdraw their money from SVB.

The run on the branches was the ultimate doom, and many SVB customers were unable to transfer their funds before the bank went into receivership and withdrawals were suspended.

SVB has counted many cryptocurrency companies among its partners, but none more significant to this story than Circle, the issuer of the highly popular USDC stablecoin.

Shortly after 10 PM (ET) on Friday 10 March, Circle confirmed the circulating speculation and announced that it had $3.3 billion locked up in SVB, about 8% of the reserves backing USDC.

USDC lost its peg to the US dollar almost immediately thereafter. By 2 AM on 11 March, a few hours after Circle’s announcement, USDC’s value had plunged to $0.87, and although it recovered some, it remained below its $1 target throughout the weekend.

This hurt the value of cryptocurrency holdings for many and triggered the liquidation of several trading positions across the cryptocurrency world.

As is often the case in times of market turmoil, outflows from centralized cryptocurrency assets increased, likely because users feared that they might collapse and leave them unable to access funds, as happened to so many after the failure of FTX.

Stablecoin statistics in 2023 according to CoinGecko

As the world of finance becomes increasingly digitized, digital currencies have taken center stage in the financial sector. However, one of the biggest challenges facing digital or cryptocurrencies is their volatility.

Stablecoins have gained significant traction in recent years due to their ability to provide the advantages of both digital and traditional fiat currencies. By maintaining a 1:1 peg to a reserve asset or algorithm, stablecoins bridge the world of digital and fiat currencies.

As of 31 January 2023, the total market capitalization of stablecoins is $138.4 billion. The total market capitalization of stablecoins has decreased by $29.5 billion since January 2022, while USD Coin (USDC) and Binance USD (BUSD) have gained market share.

Total stablecoin market capitalization started the year at $167.9 billion on 1 January 2022 and ended at $138.4 billion on 31 January 2023. The $29.5 billion contraction represents a 17.6% decline for total stablecoin market capitalization.

Across the board, all stablecoins experienced similar declines in individual market capitalization, with the exception of USDC and BUSD. Tether (USDT) suffered an annual decline of 13.5%, while Dai (DAI) fell 42.7% and Frax (FRAX) fell 43.5%.

Only USDC and BUSD experienced absolute market capitalization growth, with USDC up 1.2% and BUSD outpacing growth at 8.9%. The remaining ten stablecoins declined by an average of 67.5%.