By
Benjamin Njiri
April 23rd, 2024
USDC stablecoin issuer Circle has a staggering $3.3 billion of its total reserves with the Silicon Valley Bank. Circle has promised to cover any shortfall using corporate resources as well as external capital if required.
Last week, Silicon Valley Bank announced its collapse sending tremors across the cryptocurrency market. Over the last weekend, Circle’s native crypto USDC lost its dollar peg falling to a record low after the company declared that it has 8% of its total $4 billion in assets with Silicon Valley Bank (SVB).
SVB Exposure and Its Impact on USDC
Since USDC is a stablecoin, its value has to stay at $1.0. However, last Saturday morning, the value of the USD Coin dropped to a record low of 87 cents. Many analysts have called the fall of SVB the largest US banking failure since the 2008 financial crisis.
By the end of the last Thursday, SVB customers had withdrawn a staggering $42 billion from deposits. When the bank announced its closure, it had a negative cash balance of $958 million.
With Circle holding part of its USDC reserves in SVB, the stablecoin holders also started panicking. There were strong withdrawals of USDC at multiple exchanges leading to major price volatility. Some of the popular crypto exchanges like Binance and Coinbase had to suspend the USDC: USD transactions. However, they have stated that they would resume on Monday morning as the banks open. The biggest challenge ahead of Circle is how would it tackle massive redemptions.
A stablecoin’s peg is not truly determined by the price on an exchange.
It is determined by the ability to redeem directly from the issuer 1 for 1.
That will be the question this week. Can people redeem directly from Circle?
— The Wolf Of All Streets (@scottmelker) March 11, 2023
Circle Takes Corrective Measure
USDC stablecoin issuer Circle has said that it would cover any shortfall as part of the $3.3 billion world of customers’ funds stuck with the Silicon Valley Bank.
In its blog post, Circle said that they have a legal obligation to stand behind USDC and plans to cover shortfalls using corporate resources as well as external capital if required. Thus, they would ensure that users can redeem their USDC 1:1 against the U.S. Dollar. In his Twitter thread on Sunday, March 12, Circle CEO Jeremy Allaire wrote:
“USDC liquidity operations will resume as normal when banks open on Monday morning in the United States. As a practical matter, our teams are well prepared to handle significant volume, built on the strong liquidity and reserve assets discussed below. As a regulated payment token, USDC will remain redeemable 1 for 1 with the US Dollar”.
Circle has further reiterated its stand that the USDC is 100% collateralized with cash and US Treasuries. The stablecoin issuer wrote:
“USDC is currently collateralized 77% ($32.4B) with US Treasury Bills (with a three month or less maturation period), and 23% ($9.7B) with cash held at a variety of institutions, of which SVB is only one”.
Circle stated that its remaining 23%, which is around $9.7 billion, is in cash. Besides, they have also deposited $5.4 billion with BNY Mellon to “reduce bank risk”.circle stated that they have already initiated transfers of their $3.3 with SVB to other banking partners.
“Though these transfers had not yet been settled as of close of business Friday, we remain confident in the FDIC’s management of the SVB situation and stand ready to receive these funds,” it added.