Investors Withdraw $3 Billion From The USDC Stable Coin In Just Three Days.
Normally, USDC reflects the value of the dollar 1:1, but once Circle disclosed its exposure to SVB, it traded as low as 88 cents. Once US authorities rushed to create a rescue plan for SVB's depositors, its price spiked and it recovered its dollar value, inadvertently bolstering confidence in the cryptocurrency markets.
When the effects of Silicon Valley Bank’s bankruptcy expanded to the market for digital assets, traders withdrew a net $3 billion from the cryptocurrency stablecoin USDC in the previous three days.
The company in charge of running USDC, Circle, claimed to have cleared “virtually all” of the outstanding minting and redemption requests for USDC in recent days. Investors have redeemed a total of $3.8 billion worth of tokens over the weekend, while $0.8 billion worth of new coins has been produced, it added.
The withdrawals occurred after US-based Circle said that $3.3 billion was stuck at SVB, accounting for around 10% of the stablecoin’s entire quantity currently in circulation. To enable the movement of Circle’s deposits between digital currency and fiat money, the bank was one of the primary US banks hired by bitcoin firms.
One of the key components of trading on digital asset marketplaces is Circle’s Dollar Coin. The usage of stablecoins as money or a store of value in between crypto exchanges helps to bridge the gap between traditional and digital currency markets.
Normally, USDC reflects the value of the dollar 1:1, but once Circle disclosed its exposure to SVB, it traded as low as 88 cents. Once US authorities rushed to create a rescue plan for SVB’s depositors, its price spiked and it recovered its dollar value, inadvertently bolstering confidence in the cryptocurrency markets. Jeremy Allaire, the chief executive, said that Circle will “stand behind” the coin and fill any funding gaps with internal resources, including outside money if necessary.
The complete repayment of Silicon Valley Bank’s unsecured deposits by US authorities “enabled the USDC price to rebound,” according to Cristiano Ventricelli, an analyst at credit rating company Moody’s. Otherwise, USDC may have experienced a run and been compelled to sell its assets. When anxiety spread across the financial industry, Circle hurriedly transferred the remaining cash deposits for its reserves to other banks.
SVB held $3.3 billion of the $9.7 billion in cash. Circle transferred $5. 4 billion last week to US custodian bank BNY Mellon. An additional $1 billion was kept at Customers Bank, a little bank based in Pennsylvania. Clients’ stocks have decreased by 5% in the previous week due to uncertainty in the US banking industry.
“I understand the scale flight; it’s the belief that these banks are too big to fail, and if something goes wrong, the US government will stand behind them,” said Varun Paul, director of market infrastructure at blockchain platform Firelocks and former 14-year Bank of England employee. Even though it could turn out to be accurate, the scenario is not ideal.
The corporation felt “comfortable” after transferring the majority of its cash reserves to BNY Mellon “for the foreseeable future,” according to a source with knowledge of the situation. Two other crypto-friendly banks, Signature, and Silvergate, also went out of business after SVB’s bankruptcy, which dealt a blow to the industry’s already limited access to the traditional banking system.
This merely demonstrates how the second-largest stablecoin is not stable, which is quite hilarious, according to Larisa Yarovaya, deputy head of the Center for Digital Finance at Southampton Business School. “It might have ended up a lot worse than it did; some values have rebounded,” she said.
The collapse of the bank could be a major setback for the crypto business.
The contagious dread of bank collapses that have been spreading over the past week has threatened to devour cryptocurrency. With the bankruptcy of Silicon Valley Bank, officials earlier this week seized Signature Bank, crypto’s only significant financial ally. In the crypto environment in the United States, the signature was crucial. Some experts believe that U.S. cryptocurrency development might halt dramatically if no bank steps in to replicate its offerings.
Taylor Johnson, a co-founder of PsyFi, which develops crypto financial products, believes the effects would be “very enormous” if no U.S. banks were willing to accept deposits from crypto customers. That would be extremely unpleasant and drastically decrease cryptocurrency activity for any US person or company. The New York-based Signature Bank was not just a cryptocurrency bank; it also played a significant role in lending for real estate and providing legal services.
The bank, however, became one of the most significant legacy institutions to adopt cryptocurrency during the pandemic-era Bull Run, holding $10 billion in crypto deposits by January 2021. One of the bank’s executives at the time, Eric Howell, said that the institution was “the premier player in that sector.
Cryptocurrency firms could always instantly transfer money into and out of cryptocurrency thanks to the payment system Signet, which was also operated by Signature Bank. Signet is essential to the smooth running of numerous big exchanges, including Coinbase. According to Forbes, more than $2 trillion worth of cryptocurrency has been moved in and out of circulation since 2019 thanks to Signet and its major rival, SEN from Silvergate Bank.
Nevertheless, towards the end of last week, Silicon Valley Bank had a quick bank run as a result of many of its tech start-up clients withdrawing their deposits due to widespread worries about the bank’s financial position. Depositors scrambled to withdraw their money before it was too late as a result of the collapse of SVB, which spread fear among banks of comparable size.
Before it was taken, US prosecutors were looking into Signature’s connections to cryptocurrency clients and possible money-laundering activities. (Signet is also a defendant in a class action lawsuit alleging that FTX utilized the payment system to mix consumer monies fraudulently.) The collapse of Signature was the third-largest commercial bank failure in American history; it occurred just days after Silicon Valley Bank overtook it as the biggest.
Many in the cryptocurrency sector have expressed outrage, claiming that the confiscation of Signature’s assets was unjustified and intended only to harm them. The Blockchain Association, a trade association for the sector, declared on Thursday that it had asked the FDIC and other authorities for information under the Freedom of Information Act (FOIA), and it conjectured that government activities may have “improperly contributed” to the bank’s problems.
Crypto experts started to worry that Signet may disappear as well. “In less than a week, Crypto’s financial lines have essentially been shut down. Next up, USDC,” tweeted Ryan Selkis, a co-founder of the cryptocurrency research firm Messari, referring to the well-known stablecoin.
Discovering Banking Partners
Even if Signet stays in business, the loss of its capacity to accept cryptocurrency deposits continues to be a significant problem. Some smaller banks do take cryptocurrency, but Signature’s engagement gave the sector legitimacy, especially in the face of regulatory criticism.
A joint statement warning banks of the risks that cryptocurrency poses to the wider financial system was released in January by the FDIC and other financial authorities. Many banks, especially smaller ones, will probably refrain from taking on the danger and stigma of even considering partnering with cryptocurrency because of market tremors and regulatory scrutiny.
Several of the potential backups have also been affected by this contagious disease: Consumers Bank, a business that is generally supportive of cryptocurrencies, dropped 24% on Monday before marginally rebounding over the week. According to John Lo, managing partner of digital assets at the investment company Recharge Capital, smaller, fledgling crypto firms would be hurt more severely by the failure of Silvergate and Signature than the sector’s larger giants.
It’s probably a little simpler for crypto organizations to go to the bigger banks, he argues. Smaller cryptocurrency initiatives and businesses face the same challenges as major Silicon Valley startups. Finding financial providers for emerging, riskier businesses is extremely challenging.
PsyFi’s Johnson thinks that a few “less risk-averse” institutions would choose to accept cryptocurrency clients. He claims that if that doesn’t happen, there will probably be fewer crypto firms operating in the United States. “A crypto entrepreneur would either give up or relocate their activities overseas if they wanted to start something in the U.S. but couldn’t get a bank account,” he claims.
Retail clients wishing to acquire and trade cryptocurrency independently would also be impacted by such a circumstance. He claims that, ultimately, exchanges won’t be able to keep US money and won’t accept deposits if no US banks would accept deposits from crypto clients. And because of that, people will find it challenging to sign up for an exchange.
Edited by Prakriti Arora