Circle reassures market after stablecoin USDC breaks dollar peg

© Reuters. FILE PHOTO: In this illustration taken on March 10, 2023, the logo of SVB (Silicon Valley Bank) can be seen through broken glass. Reuters/Dado Ruvik/Illustration

by Elizabeth Howcroft and Rishabh Jaiswal

LONDON (Reuters) – Stablecoin (USDC) lost its dollar peg and fell to an all-time low on Saturday before recovering most of its losses after Circle, the firm behind it, assured investors that it is a failed silicon Will respects Peg despite the risk to Wally. Edge.

Circle said in a tweet on Friday that it has $3.3 billion of the $40 billion in USDC reserves at Silicon Valley Bank. On Saturday, the cryptocurrency company said in a blog post that USDC liquidity operations will resume as normal when banks in the United States open on Monday morning.

“As a regulated payment token, USDC will remain redeemable 1 for 1 with dollars,” the company said in a blog post.

The cryptocurrency firm said that if the bank does not return 100% of deposits, it will cover any shortfall using corporate resources, including external capital if necessary.

The coin, which broke its 1:1 dollar peg shortly after 0800 GMT (3 a.m. EST) on Saturday and traded as low as $0.88, was trading around $0.97 by 2100 GMT, according to market tracker CoinGecko. Recovered to do.

A Silicon Valley bank collapsed on Friday in the biggest US bank failure since the 2008 financial crisis, roiling global markets and stranding billions of dollars belonging to companies and investors.

Circle said in a tweet on Friday that the company and USDC “continue to operate as normal” while the firm awaits clarity on what will happen to Silicon Valley Bank depositors.

Meanwhile, US crypto exchange Coinbase (NASDAQ: Coinbase) said in a tweet that it was not allowing USDC to be exchanged for the US dollar over the weekend while banks are closed, citing “increased activity”. It plans to resume swaps on Monday.

Joseph Edwards, an investment advisor at Enigma Securities, said the situation was “extremely dire” for USDC.

“No matter how well Circle is operated, this kind of dag on a stablecoin fundamentally undermines trust,” Edwards said.

“The short-term effects here are dramatic and unnoticeable, especially once the system begins to adjust to the reality that 1 USDC is not trading at 1 USD at this point in time.”

constant exchange rate

Stablecoins are cryptocurrencies designed to maintain a constant exchange rate with “fiat” currencies – backed by a central government rather than a physical commodity such as gold – for example through a 1:1 peg to the US dollar .

Used in cryptocurrency trading, their value has increased in recent years. USDC is the second largest stablecoin with a market cap of $37 billion. The largest, according to CoinGecko, has a market cap of $72 billion.

The price of USDC usually hovers around $1, making Saturday’s drop unprecedented. According to CoinGecko data, its previous all-time low was around $0.97 in 2018, although it fell below $0.99 in 2022 when the cryptocurrency market was rocked by the collapse of crypto hedge fund Three Arrows Capital.

Traders have been cautious this week beyond signs of contagion in the financial sector and troubles for Silicon Valley bank and crypto-focused Silvergate, which this week disclosed plans to cease operations and voluntarily liquidate.

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 officer of cryptocurrency exchange Binance said in a tweet on Friday that it had no contact with the Silicon Valley bank, as did Paolo Ardoino, chief technology officer of Tether.

Stablecoin issuer Paxos and crypto exchange Gemini also tweeted that they do not have a relationship with the bank.

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