Circle Internet Financial’s USDC stablecoin, the second-largest stablecoin with a market cap of $42 billion, recently experienced a de-pegging from the U.S. dollar. This occurred due to the contagion from the collapse of Silicon Valley Bank, a bank based out of the United States which specializes in VC funding of technology-related startups.
USDC/USDT trading pair dropped as low as $0.94 on Kraken, the lowest price it has hit since April 2021. However, as of 02:54 UTC on Saturday, it had recovered to around $0.984.
The drop in USDC’s value from $1 on Friday was attributed to the failure of Silicon Valley Bank, where close to $3.3 billion worth of USDC’s cash reserves are reportedly parked. Stablecoins, such as USDC, play a crucial role in the crypto industry’s foundation.
Circle, tweeted late Friday stating that Circle and USDC continue to operate normally.
What Does This Mean for USDC Stablecoin and the Crypto Industry?
The de-pegging of USDC stablecoin from the U.S. dollar has initially caused concerns about the stability of the crypto market. As of now, USDC has rebounded back to $0.9995 at the time of writing.
Circle has reiterated that its assets of close to $42 billion are fully backed in cash and US treasuries. The company has expressed confidence in US regulatory efforts to manage the contagion to ensure that it does not spread further. Added to this, Circle has tweeted that the entire amount of $3.3 billion in reserves are secure and will be available for banking from 14th March.
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Stablecoins play a crucial role in the industry, serving as a reliable means of exchange and a store of value. They provide an alternative to traditional fiat currencies, which can be prone to inflation and other economic factors.
The recent events surrounding USDC have highlighted the importance of transparency and accountability in the traditional banking industry. SVB’s collapse furthered the startup funding winter. Several depositors, most of which include several technology and health care related startups now have their funds withheld. It is yet to be seen how the US administration copes with the situation and mitigates further contagion.
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The events surrounding the collapse of Silicon Valley Bank have raised concerns about the impact of interest rates and the Federal bank’s initiative to curb inflation. Close to $175 billion in deposits are right now under the control of Federal Deposit Insurance Corp.
SVB had bought a huge amount of bonds a year ago in the hope to gain returns. The increase in interest rates affected the returns on the bonds. Added to this, the rise in withdrawals from the bank led to the bank selling bonds at a $2 billion loss to meet depositor needs. While the bank is small compared to several other large US banks, it shows that even under tight regulations, traditional banks could be exposed to a black swan event.