USD Coin, or USDC, is a type of digital currency that is fully backed using U.S. dollar assets, with the value of 1 USDC pegged to the value of a dollar at 1:1. It is meant to be stable, which is why it is known as a stablecoin, and is not subject to the type of price fluctuations seen by cryptocurrencies such as Bitcoin and Ethereum. USDC is currently the second-biggest stablecoin by market cap behind Tether USDT.
However, the coin broke its dollar peg following the collapse of Silicon Valley Bank, dropping as low as 88 cents on Saturday. Silicon Valley Bank was one of the main American banks used by cryptocurrency companies as a conduit between sovereign money and cryptocurrency, and the bank’s collapse was the biggest failure on record for an American bank since the crisis of 2008. The drop came after USDC issuer Circle announced in a tweet last week that it had $3.3 billion of its $40 billion in USDC reserves at the bank. This prompted a flurry of withdrawals, with the net $3 billion total representing nearly 10 percent of the coin’s circulating supply.
USDC regained its dollar peg after authorities set up a rescue package for Silicon Valley Bank depositors, which boosted confidence in cryptocurrency markets. Circle announced that it would be permitting automatic USDC redemption via a new banking relationship with Cross River Bank.
In a blog post, Circle said that it processed $3.8 billion worth of USDC redemptions for investors who wanted to swap their tokens back to dollars and created $0.8 billion more of the tokens from Monday through Wednesday. This means that investors pulled roughly $3 billion during the three days in question.
Moody’s Analyst Cristiano Ventricelli said that USDC could have been in serious trouble without the rescue.
“The decision by US regulators to repay Silicon Valley Bank’s unsecured deposits in full allowed the USDC price to recover,” he said.
“Otherwise, USDC could have suffered from a run and been forced to liquidate its assets.”
Could financial institutions reconsider their involvement with stablecoin operators?
In a note, Moody’s analysts also said that USDC’s loss of its peg should serve as a reminder that the links between traditional finance and crypto can be unpredictable and that the incident “could prompt financial institutions to reconsider working with stablecoin operators.”
"This scenario would increase stablecoins’ dependence on a smaller number of institutions and constrain their ability to maintain stable exchange rates," they added.
Rival stablecoin Tether appears to be the big winner in the recent chaos, with its market capitalization hitting nearly $75 billion yesterday morning and reaching nearly twice that of USDC. In March 2020, USDC’s market cap was around $564 million; it is now at $37.7 billion.
Many investors who left USDC for alternatives during its brief depegging have not yet returned. Saturday’s drop was unprecedented for the coin; its previous record low was around 97 cents in 2018. However, it did drop just under 99 cents during the market scare caused by the collapse of the crypto hedge fund Three Arrows Capital.
Last month, American banking regulators issued a new warning that the crypto deposits in banks may be subjected to liquidity risks. They pointed to deposits linked to stablecoins in particular as being vulnerable to volatility at times of market stress should a sudden influx of redemption requests be made.
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