Crypto Exhales As USDC Stablecoin Rebounds To Peg After Being Stirred By SVB Exposure

(Bloomberg) — Crypto’s second-largest stablecoin rallied toward its target $1 peg as publisher Circle Internet Financial Ltd. pledged to cover any shortfall of $3.3 billion in chargebacks at the collapsed Silicon Valley Bank.

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USD Coin, a key shelf in crypto markets, rose as high as USD 1 and traded at 98.2 cents as of 10:50 am Sunday in Tokyo. The coin had previously yielded less than 85 cents in a depeg that caused a shudder from digital assets.

Circle reiterated that its stablecoin, also known as USDC, is fully backed by $42.1 billion in cash and US Treasury bonds. The company said outgoing transfers of the $3.3 billion at Silicon Valley Bank that started as of Thursday are yet to be settled, but expressed confidence in US regulatory efforts to contain the overall situation.

Circle said it’s possible that “SVB may not return 100% and any returns may take some time,” in which case the company will “as required by law under the stored-value transfer regulations, behind USDC will stand and cover any shortfall with the help of company resources, with external capital if necessary.”

The volatility in USDC, which is supposed to be one of the safest assets in crypto with a constant value of $1, had spread to other stablecoins like Dai and Pax Dollar, but they were closing in on their pegs as well. Top stablecoin Tether or USDT — which has come under scrutiny for its reserves — said Friday that it has no exposure to Silicon Valley Bank and is holding at $1 or more.

“There has been a two-way flow with some just freaking out and wanting out of USDC,” said Spencer Hallarn, derivatives trader at investment firm GSR. Some investors moved to Tether “as a temporary shelter,” while on the other hand, traders “do the math on probable depreciation and value purchases,” he said.

Race for deposits

On Friday, Silicon Valley Bank became the largest U.S. lender to fail in more than a decade. Deposits up to the Federal Deposit Insurance Corp. protected limit of $250,000 will be available on Monday.

Regulators are scrambling to sell assets and make some of customers’ uninsured deposits available as soon as possible — the numbers are being circulated behind the scenes for an initial payment of 30% to 50% or more.

In previous tweets, Circle’s Chief Strategy Officer Dante Disparte described the fall of Silicon Valley Bank as a “black swan failure” in the US financial system, saying that without a federal bailout there would be “wider implications for business, banking and entrepreneurs.”

Stablecoins are believed to have a fixed value against another highly liquid asset such as the US dollar. Some, like Circle’s, are backed by cash and bond reserves. Investors often park their money in stablecoins while switching between crypto transactions or accessing blockchain-based financial services.

‘Situation will rectify’

USDC has a circulating supply of about 41 billion tokens with a market value of about $40 billion, according to CoinGecko data. As of Friday, billions of dollars of the token have been redeemed by traders.

US-based crypto exchange Coinbase Global Inc. said it would “temporarily pause” the conversion of USDC to US dollars over the weekend and resume Monday when banks open.

“It is likely that the USDC situation will improve,” wrote Noelle Acheson, author of the “Crypto Is Macro Now” newsletter. “Monday should bring news of a solution for SVB depositors, and Circle will be able to get at least some money back in the short term, while the banknotes become exchangeable for the rest.”

The swings in USDC had a knock-on effect on decentralized finance or DeFi applications, which allow users to trade, borrow and lend coins and tend to rely heavily on trading pairs involving the stablecoin. On Saturday, members of the DeFi community that runs DAI proposed changes to the mechanism that helps keep the stablecoin pegged at $1 to reduce exposure to USDC.

Crypto’s Challenges

The crypto sector continues to reel from a protracted defeat that has knocked $2 trillion off digital asset values ​​since November 2021, leading to a series of implosions such as the algorithmic TerraUSD 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 maintain its value. The $60 billion destruction of that system tightened regulatory scrutiny of stablecoins.

“The market ‘panic-priced’ USDC like it priced USDT around the collapse of Luna,” said Haohan Xu, CEO of Apifiny, an institutional trading platform.

Broader digital asset markets are wrapping up a week of losses. Bitcoin is down about 9% over the period, the most since a weekly drop of 23% in November during the collapse of Sam Bankman-Fried’s FTX platform.

For crypto market prices: CRYP; for top crypto news: TOP CRYPTO.

–With assistance from Suvashree Ghosh, Olga Kharif, David Pan and Shiyin Chen.

(Updates with USDC’s partial rebound from the first paragraph.)

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