USDC, the second largest stablecoin, has lost its peg and is currently trading at 90.6 cents to the dollar. It follows the revelation by issuer Circle that $3.3 billion of USDC’s reserve assets were held at Silicon Valley Bank (SVB). On Friday, the California regulator put the bank under the control of the Federal Deposit Insurance Corporation (FDIC) following Thursday’s attempts by SVB clients to withdraw $42 billion, or around a quarter of the bank’s deposits.
It appears Circle was one of the clients that attempted a withdrawal on Thursday that didn’t go through. The stablecoin’s price has recovered from a low of 87.6 cents three hours ago.
Circle keeps around 25% of its reserves in cash at six banks, with the balance mainly in a bespoke money market fund holding Treasuries and managed by Blackrock.
Coinbase, which uses USDC as its primary stablecoin, said it was temporarily pausing conversions of USDC to fiat currency over the weekend while banks are closed. It says it plans to recommence conversions during bank opening hours on Monday.
FDIC insurance only covers deposits up to $250,000. Given that most of SVB’s clients are Silicon Valley companies and startups, many deposits have large balances and are not covered by insurance.
The big question is whether there will be a Federal rescue. Silicon Valley Bank, with $209 billion in assets, is the second largest bank failure in U.S. history. On Friday, U.S. Treasury Secretary Janet Yellen called a meeting with the Federal Reserve, FDIC and Office of the Comptroller of the Currency (OCC).
Without a rescue, Circle’s other options are to raise additional capital or mint a token to compensate USDC holders for the shortfall. There is precedent for token minting as compensation in the crypto world, but Circle has a conservative stance, and regulators might frown on it. In terms of raising capital, it joins the queue with many other startups with big deposits at SVB. Circle’s existing backers include Blackrock, Fidelity, and Bloomberg’s philanthropy arm.
There’s some irony in the stablecoin world. The largest stablecoin, Tether, is viewed as risky by some. But in February, conservative stablecoin issuer Paxos was instructed to stop issuing the Binance USD stablecoin. And now another conservative stablecoin issuer, Circle, faces a crisis.