The fallout from the collapse of Silicon Valley Bank spread overnight to the USDC stablecoin, which lost its peg to the U.S. dollar and dropped as low as $0.88.
Following Circle’s disclosure that it has $3.3 billion of USDC’s reserves with the failed Silicon Valley Bank, investors scrambled to exit their USDC holdings. They swapped them into alternative stablecoins like Tether’s USDT or chose to exit the crypto market entirely into fiat, causing USDC’s biggest depeg since its inception in 2018 and its market cap to fall below $40 billion — down more than 15% in the last 24 hours.
Demand for USDT caused it to move in the opposite direction on some exchanges, spiking to $1.06 against the dollar at one point on Kraken.
Remaining below peg
Currently, USDC and DAI are at $0.90. Tether is keeping its peg well, while most other stablecoins are seeing minor drops from their pegs. Overnight, USDC and DAI fell as low as $0.88 before rebounding.
The $3.3 billion held at Silicon Valley Bank, which has become the largest bank to fail since 2008, is part of Circle’s $40 billion reserves, amounting to some 8.25% — roughly the size of the depeg.
Following the disclosure, Coinbase halted its conversion feature between U.S. dollars and USDC until after the weekend. This was due to heightened activity. Binance has also suspended auto-conversion of USDC into BUSD due to high inflows.
A lot of USDC has been burned. Nansen noted that $2.34 billion had been burned in the last 24 hours, while $366 million was minted during that time. This suggests that big traders are redeeming their stablecoins for dollars with Circle.
If USDC were to fall much further, the repercussions across the crypto market could intensify. According to DeFiLlama, if it fell below $0.865, for example, $50 million in USDC collateral would be liquidated on DeFi lending platforms like Aave and Compound (unless further collateral is provided).
It wasn’t just centralized exchanges where the impact was felt, either, with Ethereum transaction fees jumping around tenfold as USDC holders rushed for the exits.
Addresses labeled by Etherscan as belonging to high-profile crypto personalities like Tron founder Justin Sun were also tracked swapping millions in USDC for other stablecoins.
Backed by USDC
While DAI is a decentralized stablecoin, it’s collateralized by other stablecoins — the biggest among them USDC. The stablecoin is about 36% backed by USDC, according to daistats.
During the depegging events, some traders used their USDC as collateral to generate DAI, through its peg stability module. This has now reached its cap of 3.1 billion USDC, so no more DAI can be minted with USDC.
Frax, another decentralized stablecoin that’s also partly backed by USDC, was down to $0.90.
Unbanking the banks
On Friday, Silicon Valley Bank, which banked crypto firms as well as start-ups and venture capitalists, plunged 63% in pre-market trading before being halted after companies were urged to pull funds from the bank. Silicon Valley Bank was then closed by the California Department of Financial Protection and Innovation, with the Federal Deposit Insurance Corporation appointed as the receiver.
Silicon Valley Bank was the second crypto-friendly bank to fail this week after Silvergate Bank confirmed it was voluntarily liquidating and winding down operations.
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