Crypto Exhales as USDC Stablecoin Rebounds to Peg After Shaking Off SVB Exposure

(Bloomberg) – Crypto’s second-largest stablecoin bounced back towards its expected $1 peg as issuer Circle Internet Financial Ltd. pledged to cover any shortfall of $3.3 billion in inversions held at the bankrupt Silicon Valley Bank.

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The USD Coin, a key component in the crypto markets, hit $1 and was trading at 98.2 cents at 10:50 a.m. Sunday in Tokyo. The coin previously fetched less than 85 cents in a depeg which sent digital assets shaking.

Circle reiterated that its stablecoin, also known as USDC, is fully backed by $42.1 billion in cash and US Treasuries. The company said outbound transfers of $3.3 billion to Silicon Valley Bank initiated on Thursday had yet to be settled, but expressed confidence in U.S. regulatory efforts to manage the overall situation.

Circle said it was possible that “SVB may not be 100% returnable and any returns may take some time”, in which case the company “as required by law under transmission regulations. Stored Value Money, will stand behind the USDC and cover any shortfall using company resources, involving outside capital if necessary.

The volatility of USDC, which is supposed to be one of the safest assets in crypto with a constant value of $1, has spread to other stablecoins like Dai and Pax Dollar, but they have also close to their ankles. Top stablecoin Tether or USDT – which has already come under scrutiny for its reserves – said on Friday it had no exposure to Silicon Valley Bank and remained firm at $1 or more .

“There’s been a two-way flow with some panicking and wanting to get out of USDC,” said Spencer Hallarn, derivatives trader at investment firm GSR. Some investors have moved to Tether “as a temporary hideout” while on the other side, traders are “calculating the likely depreciation and value buying” USDC, he said.

Race for deposits

On Friday, Silicon Valley Bank became the largest US lender to fail in more than a decade. Deposits up to the Federal Deposit Insurance Corp. protected limit of $250,000. should be available on Monday.

Regulators are rushing to sell assets and make some of customers’ uninsured deposits available as soon as possible – with figures being announced behind the scenes for an upfront payment ranging from 30% to 50% or more.

In previous tweets, Circle Chief Strategy Officer Dante Disparte described the fall of Silicon Valley Bank as a “black swan failure” in the US financial system, saying that without a federal bailout there is would have “wider implications for businesses, banks and entrepreneurs.”

Stablecoins are meant to hold a fixed value against another highly liquid asset like the US dollar. Some, like Circle’s, are backed by cash and bond reserves. Investors often place funds in stablecoins when moving between crypto transactions or accessing blockchain-based financial services.

“Things will get better”

USDC has a circulating supply of around 41 billion tokens with a market value of around $40 billion, according to data from CoinGecko. Billions of dollars worth of tokens have been redeemed by traders since Friday.

U.S.-based crypto exchange Coinbase Global Inc. said it will “temporarily suspend” converting USDC to U.S. dollars over the weekend and resume Monday when banks open.

“The USDC situation is likely to rectify itself,” wrote Noelle Acheson, author of the “Crypto Is Macro Now” newsletter. “Monday should bring news on a solution for SVB depositors, and Circle will be able to recover at least some of the funds in the short term, while obtaining redeemable tickets for the rest.”

USDC fluctuations have had a knock-on effect on decentralized finance – or DeFi – apps, which allow users to trade, borrow and lend coins and tend to rely heavily on trading pairs involving the stablecoin. On Saturday, members of the DeFi community that runs DAI proposed changes to the mechanism that helps keep its stablecoin pegged at $1 to reduce exposure to USDC.

Crypto Challenges

The crypto sector continues to recover from a protracted rout that has seen the value of digital assets plummet by $2 trillion since November 2021, precipitating a series of implosions such as algorithmic stablecoin TerraUSD, hedge fund Three Arrows Capital and the FTX exchange.

The TerraUSD token – known as UST – tried to use a mix of algorithms and trader incentives involving sister token Luna to retain its value. The $60 billion wipe from this system has heightened regulatory scrutiny of stablecoins.

“The market priced USDC like it priced USDT around the Luna crash,” said Haohan Xu, managing director of Apifiny, an institutional trading platform.

Broader digital asset markets end a week of losses. Bitcoin was down about 9% in the period, the highest since a weekly plunge of 23% in November amid the collapse of Sam Bankman-Fried’s FTX platform.

For crypto market prices: CRYP; for the best crypto news: TOP CRYPTO.

–With help from Suvashree Ghosh, Olga Kharif, David Pan and Shiyin Chen.

(Updates with USDC’s partial rebound from the first paragraph.)

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