USDC Recouping its Lost Peg, Suffers due to SVB Exposure

Due to SVB exposure, USDC lost its peg but soon recoiled to the $1 peg after the issuer pledged to cover losses. Circle Internet Financial Ltd. held $3.3 billion in reserves in the second-largest bank collapse in US history.

USDC losing Peg & Its Implication

USDC, which theoretically must be around $1 always, was trading at $0.982, which is considered a normal threshold. Still, it dropped to $0.85, depegging its value and sending a wave of distress in the crypto industry.

To calm the anxiety in the industry, Circle came out and said that their stablecoin was safe. USDC is entirely backed by $42.1 billion (cash and US treasuries). Regarding the $3.3 billion stuck with SVB, the issuer said that the outbound transfers initiated by the collapsed bank on Thursday are yet to settled.

Circle is confident that the regulatory efforts of the federal agency in managing the situation would be helpful. If SVB did not return the complete amount, any returned amount would take some time. In this situation, as required by the law of under-stored-value money transmission regulation, the issuer will stand by USDC in doing the needful.

USDC is considered one of the safest stablecoins out there. Its depegging caused a domino effect and caused other stablecoins like Dai and Pax Dollar to also lose their pegs, but both managed to regain them later on. At the same time, the top stablecoin, USDT, was unfazed by the situation as it never had any exposure to SVB.

SVB collapse a “black swan failure”

Dante Disparte, Chief Strategy Officer at Circle, called the SVB collapse a “black swan failure” in the US financial system. Had the federal rescue plan not been in place, much broader and heavy implications would have been visible across the market.

On March 10, 2023, the fall of Silicon Valley Bank became the second biggest lender failure in the US in more than a decade.

To make the said amount available by Monday, regulators are actively selling assets, which would make a portion of clients’ uninsured deposits available. According to initial figures, the initial payment could be 30% to 50%, which might be more.

Market hopes for USDC recovery

USDC has a circulating supply of $40.7 billion and a market cap of $39.6 billion. Crypto exchange Coinbase has temporarily halted the conversion of USC to USD for the weekend. However, services will be resumed when banks open on Monday.

The depegging of USDC pinched the old wounds of the Terra ecosystem collapse when the algorithmic stablecoin lost its peg due to technical flaws. This event supposedly started a domino effect, later consuming Three Arrows Capital, FTX, Blockfi, etc.

The recession of 2008 was triggered by the Lehman Brothers’ collapse. The collapse of a big bank sparks fear, but with lessons learned from the past, hopefully this time the situation may be contained.