Explaining the Silicon Valley Bank Fallout and USDC De-Peg
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Explaining the Silicon Valley Bank Fallout and USDC De-Peg

Created 8mo ago, last updated 8mo ago

Silicon Valley Bank's collapse caused USDC to depeg from $1 over the weekend, hitting a low of $0.88.

Explaining the Silicon Valley Bank Fallout and USDC De-Peg

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USDC repegs following Circle CEO Jeremy Allaire's statement that "100% of deposits from SVB are secure and will be available at banking open tomorrow."
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So, USDC de-pegged. And now?

Source: https://coinmarketcap.com/currencies/usd-coin/

Is this as bad as UST? Will USDC go back to $1? And what does Silicon Valley Bank have to do with it?

Covering it all in this short explainer.

What Happened to USDC?

In the early Saturday morning hours, the Silicon Valley Bank (SVB) failure caused USDC to de-peg from $1. The price dipped to almost $0.88 before recovering to around $0.96 at the time of writing. The reason for the de-peg is that Circle, the company issuing USDC, has $3.3 billion in reserves tied up at SVB. This is money backing the value of USDC and if it was to be lost as part of SVB's failure, it would mean a financial hit for Circle.

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What Happened to Silicon Valley Bank?

Last Friday, Silicon Valley Bank (SVB) was shut down by the California Department of Financial Protection and Innovation — as the bank collapsed due to a bank run amid concerns over its financial health. This was the second largest bank failure in the U.S. since Washington Mutual in 2008.

The state-chartered commercial bank has a lot of crypto entities as clients, making its failure particularly relevant for the crypto industry. The Federal Deposit Insurance Corporation (FDIC) has taken receivership of the bank. According to an FDIC press release, all insured depositors will have access to their insured deposits no later than Monday morning.

How Bad Is This For USDC?

Not great by any means. But there is good reason to believe it is nowhere near as bad as UST, meaning USDC is not going to zero. DeFiIgnas explains it here:

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As Ignas explains, Circle has a fraction of its reserves stuck in SVB. But that is only about 8% and it does not mean the money is gone. Most of its reserves are actually short-term treasury bills and the fraction held at SVB will likely be recoverable to a large degree. It could end with Circle taking a slight financial hit that is easily recoverable from the profits it makes by operating a stablecoin.

But Then Why Did USDC De-Peg So Much?

Likely because the market has PTSD from the UST collapse. And because Coinbase and Binance stopped USDC conversions and contributed to an illiquid market. Also the Curve 3pool got drained very quickly:

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What Happens Now?

On Monday, insured depositors will get paid from Silicon Valley Bank. Depending on how much money can be recovered from Circle's stuck assets, we will find out how big the financial hit will actually be.

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How did Crypto Twitter React?

Crypto Twitter was unexpectedly shocked by the developments. As Gainzy puts it nicely:

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There is certainly a sense of frustration and "is there even a purpose to this" around big Crypto Twitter accounts. ChainLinkGod points out nicely what has gone wrong over the last few months:

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The fallout is, for now, still to be determined. How and whether USDC completely re-pegs is unclear. Ideally, it would just end up being a stress test for the stablecoin, as Andrew Kang put it:

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As the story develops, CoinMarketCap Academy will provide more updates, so check back in for more.

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