The value of the world’s fifth-biggest cryptocurrency, USD Coin (USDC), slumped to an all-time low on Saturday after Circle, the US firm behind the coin, revealed that $3.3bn of the reserves backing it were held at Silicon Valley Bank.
USDC is a stablecoin – cryptocurrencies designed to maintain a stable value – USDC’s value is supposed to mimic the dollar. But the coin broke its 1:1 dollar peg and fell as low as $0.87 on Saturday morning.
Circle announced on Friday that $3.3bn of its $40bn of USDC reserves are held at collapsed lender Silicon Valley Bank. But the effects of SVB’s collapse are only beginning to be understood.
California governor Gavin Newsom issued a statement Saturday that he’s been in communication with the White House and US treasury department.
“Everyone is working with FDIC [Federal Deposit Insurance Corporation] to stabilize the situation as quickly as possible, to protect jobs, people’s livelihoods, and the entire innovation ecosystem that has served as a tent pole for our economy,” he said.
Fears of a spreading contagion were also realized in the UK, where SVB’s subsidiary unit was set to be declared insolvent. Leaders of roughly 180 tech companies called chancellor Jeremy Hunt to intervene in the crisis.
Separately, a newly-formed, government-administered SVB entity, called the Deposit Insurance National Bank of Santa Clara, or DINBSC, sent a letter to an estimated 8,500 SVB employees offering 45 days of employment after which they would be let go, according to Bloomberg.
Silicon Valley Bank collapsed on Friday in the largest US bank failure since the 2008 financial crisis, roiling global markets and stranding billions of dollars belonging to companies and investors. Worried depositors formed queues outside SVB’s branches hoping to withdraw funds beyond the $250,000 guaranteed by federal banking regulations.
The gathering fallout followed reports that SVB did not have a chief risk officer in place in the months leading up to the collapse, while more than 90% of its more than $212bn in deposits were not insured.
For now, concerns about contagion to other areas of the financial system appeared limited to crypto-currencies early Saturday.
But SVB, based in Santa Clara, California, holds deposits of about one tenth the size of JPMorgan, the largest US bank. It abruptly collapsed after failing to raise money to meet withdrawal demand after saying it had sold about $21bn of securities from its portfolio, resulting in a $1.8bn loss for the first quarter.
Bloomberg estimated that SVB does business with almost half of all US venture capital-backed startups, and 44% of US venture-backed technology and healthcare companies that went public last year.
Those businesses, which rely on cheap money and the good-will of investors in search of a “unicorn” – a start-up with a billion-dollar valuation but little by way of cash flow – have been hit hard by rising interest rates.
SVB, the Wall Street Journal noted Saturday, was burdened by using short-term money from depositors to invest in assets that could not be swiftly unloaded to meet customer withdrawals when new depositor funding dried up.
SVB chief executive officer Greg Becker said in a letter to shareholders that the bank had been hit by “continued higher interest rates, pressured public and private markets, and elevated cash-burn levels from our clients”.
But none may be more vulnerable than the crypto-business, already reeling from a broad collapse in the value of its tokens and the bankruptcy of the crypto-exchange FTX that led to the arrest of CEO Sam Bankman-Fried on fraud charges.
On Friday, Circle said in a tweet that it and USDC “continue to operate normally” while the firm waits for clarity on what will happen to Silicon Valley Bank depositors.
Circle did not immediately respond to a request for comment about the dollar peg, sent outside of US working hours.
Used in cryptocurrency trading, they have surged in value in recent years. USDC is the second-biggest stablecoin with a market cap of $37bn . The largest, Tether, has a market cap of $72bn, according to CoinGecko.
USDC’s price usually holds close to $1, making Saturday’s drop unprecedented. According to CoinGecko data, its previous all-time low was around $0.97 in 2018, though in 2022 it fell just below $0.99 when cryptocurrency markets were roiled by the collapse of crypto hedge fund Three Arrows Capital.
Traders have been on guard this week for signs of contagion in the financial sector and beyond from troubles for Silicon Valley Bank and crypto-focused Silvergate (SI.N), which this week disclosed plans to wind down operations and voluntarily liquidate.
Boston-based Circle said last week it had moved 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 it 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 do not have relationships with the bank.
Reuters contributed to this report
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