Over the past week, investors understandably became concerned over the news that billions of dollars backing USD Coin (USDC) — the second-largest stablecoin — were locked up in the distressed Silicon Valley Bank (SVB). USDC lost its dollar peg as a result of the market’s violent reaction. Although the market was concerned, it is now clear that USDC creator Circle will be able to access its funds again. The crypto community can now breathe easily.
It began as a tremor.
Many sensors are hidden on the seafloor off the coast Japan. The sensors are trained to detect any tremors and send data at light speeds to laboratories on the main Island. The seismic activity that occurs when the fault lines connecting the ocean trenches hit together will be detected. This gives islanders precious time to retreat to higher ground before a tsunami strikes.
The lines plotted by the seismograph which tracks the financial health of the United States bank system last week were jagged. There was clearly something wrong under the surface. It was clear that trouble was imminent. According to reports, Silicon Valley Bank had run out cash, a bank that is relied on by thousands, including crypto-based startups. Not fulfilling wires that had been sent to Silicon Valley Bank the night before.
The seismograph had started shaking, despite having detected activity increase with the collapse at Silvergate Bank days before. A tsunami was clearly on the horizon. The weekend was a chaotic one with U.S. banks shut down and SVB customers anxiously awaiting news on a bailout for their deposits. This has increased pressure on well-known businesses to make public their holdings.
What is the Probability of $USDC Defaulting is Low
With the recent news of USDC’s potential default, many are panicking.
It isn’t as bad as it looks.
Here’s why the probability of USDC defaulting is actually low: (thread)— Gracy Chen (@GracyBitget) March 11, 2023
Circle, which is the issuer for the USDC stablecoin that is 100% fiat collateralized, is one of them. It released a statement on Saturday confirming that $3.3 Billion of the $40 billion used in backing USDC was held by Silicon Valley Bank. Rather than reassuring investors that the bulk of Circle’s funds is safe, the revelation had the reverse effect: Confidence in USDC wobbled, and the stablecoin, which had clung closely to its $1 peg throughout its four-year lifespan, began to fall.
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People demanded that USDC be shorted. Some major derivatives trading platforms even created a market specifically for the purpose. As panicked USDC holders looked for refuge in other stablecoins at all costs, arbitrageurs started making a profit from price inefficiencies. Other stablecoins like the USDC-collateralized Frax and Dai, which also lost their pegs, too. It’s clear there’s a wave heading for the shore.
Rumors of USDC’s demise have been exaggerated
While SVB shareholders are not slated for a bailout, the U.S. federal government announced it would cover the bank’s uninsured depositors. Circle will be fine. What about USDC? Over the weekend, the once-stable token plunged to a low of $0.88 as traders tried to price in USDC being under-collateralized. USDC is now trading between $0.99 to $1.01 as of March 13th.
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However, as the dust settles, there are still questions about USDC and all stablecoins. These include their ability to keep their pegs intact through thick and thin. The panic over Silicon Valley Bank may be over. The crypto industry now has to restore trust in stablecoins, which are the foundation of its business. “Don’t trust, verify” is crypto’s core mantra. Yet, despite all the cryptographic proof, it is still a business that relies on faith, just like TradFi.
It may not have developed into a Richter-shattering earthquake, but the tremors caused by Circle’s exposure to SVB have reverberated through the crypto sphere. Achieving stability in an unstable world is a challenge that’s bigger than crypto. Future systemic shocks can be prevented by rethinking the principles we once believed to be infallible.
This article is intended for informational purposes only and should not be construed as investment or legal advice. The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.