USDC is edging closer to its peg after its issuer, Circle, said it would stand by the stablecoin. Traders are still flocking to alternatives as concerns persist that Silicon Vallet Bank’s failure will impact the token.
USDC, the second-largest stablecoin, traded within a one-cent range near $0.97 over the past six hours after crashing to as low as $0.88 yesterday. USDC recovered after Circle said the token will be redeemable at 1 to 1 with the US dollar starting Monday.
If SVB doesn’t make depositors 100% whole, “Circle, as required by law under stored-value money transmission regulation, will stand behind USDC and cover any shortfall using corporate resources, involving external capital if necessary,” according to the statement.
USDC is still not back to its peg, however, signaling investors are betting Circle may not be able to access all of its deposits.
Many users rushed to trade their depegged stablecoins for Tether’s USDT, the largest centralized stablecoin, and Liquity’s LUSD, a decentralized and overcollateralized stablecoin exclusively backed by Ether.
Roughly $73M worth of LUSD changed hands on Saturday, marking the token’s second-largest daily volume on record, according to CoinGecko.
Trouble started Wednesday when Silvergate Bank announced it was winding down operations and entering into voluntary liquidation proceedings after suffering a bank run. While many large CeFi firms were quick to declare they had no material exposure to Silvergate, Circle said it was “unwinding certain services” with the platform.
But Circle ran into more problems on Friday when another of its six banking partners, Silicon Valley Bank (SVB), was shut down by The California Department of Financial Protection and Innovation (DFPI) in the largest failure of a U.S. bank since the 2008 financial crisis. The DFPI seized the bank’s deposits.
SVB filed a regulatory filing revealing it needed $2.25B to meet deposits, triggering its clients to withdraw $42B that day. The run left the bank with a negative cash balance of $958M.
Circle tweeted that $3.3B or 8% of its $40B in reserves is held at Silicon Valley Bank (SVB), sending shockwaves across the stablecoin landscape.
The news drove a sharp and sudden sell-off for USDC. DAI, the stablecoin issued by MakerDAO, also sold off as it is partially backed by USDC.
USDC became the third collateral asset supported by MakerDAO in March 2020, garnering criticism that DAI’s decentralized structure was at risk of being compromised by collateral assets underscoring its supply.
With USDC now representing more than 42% of DAI’s collateral, according to Daistats, tokenholders rushed to reduce their holdings as news of Circle’s SVB circulated. DAI continued to bleed despite Maker highlighting that it is collateralized by more than 150%, with $8.26B worth of assets backing 5.38B DAI tokens.
In less than five hours, both stablecoins had slumped to lows of $0.88.