(Adds Coinbase, analyst comment)
LONDON, March 11 (Reuters) –
By Elizabeth Howcroft and Rishabh Jaiswal
Stablecoin USD Coin (USDC) lost its peg to the dollar and slumped to an all-time low on Saturday after Circle, the US company behind the coin, revealed that some of the reserves backing it were held at Silicon Valley Bank.
Circle holds $3.3 billion of its $40 billion in USDC reserves with collapsed lender Silicon Valley Bank, the company said in a tweet on Friday.
The coin broke its 1:1 dollar peg and fell to $0.88 shortly after 0800 GMT on Saturday, according to market tracker CoinGecko. It rallied slightly to trade around $0.90 at 11:20 GMT.
Silicon Valley Bank collapsed on Friday in the biggest U.S. bank failure since the 2008 financial crisis, rocking global markets and locking up billions of dollars belonging to businesses and investors.
Circle said in a tweet on Friday that the company and USDC “continue to operate as normal” while the company awaits clarification on what will happen to depositors at Silicon Valley Bank.
Meanwhile, US crypto exchange Coinbase said in a tweet that it is not allowing the exchange of USDC for US dollars over the weekend while banks are closed, citing “activity heightened,” as he plans to resume trading on Monday.
Circle did not immediately respond to a request for comment on the dollar peg, sent outside of working hours in the United States.
Joseph Edwards, investment adviser at Enigma Securities, said the situation was “extremely serious” for USDC.
“No matter how strong Circle’s operations are, this type of depeg on a stablecoin tends to fundamentally undermine confidence in it,” Edwards said.
“The short-term implications here are dramatic and unknowable, especially once systems start to need to adjust to the reality that 1 USDC is not trading at 1 USD at this time.”
CONSTANT EXCHANGE RATE
Stablecoins are cryptocurrencies designed to maintain a constant exchange rate with “fiat” currencies – those backed by a central government rather than a physical commodity like gold – for example via a peg to the US dollar of 1: 1.
Used in cryptocurrency trading, they have risen in value in recent years. USDC is the second largest stablecoin with a market capitalization of $37 billion. The largest, Tether, has a market capitalization of $72 billion, according to CoinGecko.
USDC price is generally holding close to $1, making Saturday’s decline unprecedented. According to data from CoinGecko, its previous all-time low was around $0.97 in 2018, although in 2022 it fell to just below $0.99 when the cryptocurrency markets rocked. by the collapse of crypto hedge fund Three Arrows Capital.
Traders have been on their toes this week amid signs of contagion in the financial sector and beyond issues at Silicon Valley Bank and crypto-focused Silvergate, which this week unveiled plans to end to its operations and to liquidate itself voluntarily.
Boston-based Circle said last week that it had transferred a “small percentage” of USDC reserve deposits held at Silvergate to its other banking partners.
The chief executive of cryptocurrency exchange Binance said in a tweet on Friday that he had no exposure to Silicon Valley Bank, as did Tether chief executive Paolo Ardoino.
Stablecoin issuer Paxos and crypto exchange Gemini also tweeted that they have no relationship with the bank. (Reporting by Elizabeth Howcroft in London and Rishabh Jaiswal in Bengaluru; Editing by William Mallard and David Holmes)