When Silicon Valley Bank, a traditional lender in the heart of one of the wealthiest places on earth, suddenly ran out of money last week, rattled investors dumped Circle’s USDC.
The No. 2 stablecoin, which had $3.3 billion in reserve deposits at SVB, slipped its dollar peg and plunged to 88 cents. USDC wasn’t alone — MakerDAO’s DAI sank to 88 cents, as did the stablecoin issued by Frax Finance.
“Contagion from TradFi to crypto is basically the opposite of what everyone has been worried about,” Sean Tuffy, a market structure expert and Citigroup alum, told DL News.
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But the panic didn’t last. Investors scooped up USDC as it fell, said Gustav Arentoft, the co-founder and CEO of StableLab, a Lisbon-based DeFi governance project. That may have been behind massive volume spikes as spooked investors flocked to decentralised exchanges.
Curve, a decentralised exchange, handled a record $8 billion in volume, said Nagaking, Curve’s pool optimisation researcher. And Uniswap, the No. 1 DEX, executed $12 billion in transactions on Saturday, a 70% jump over its prior high.
Trading USDC
Many investors were jumping on one of the juiciest trades they’ve seen in a punishing bear market — discounted USDC. They knew Circle held billions of dollars in cash and short-term US Treasury bonds at multiple banks, not just SVB, thanks to the issuer’s January audit.
With Twitter and social media brimming with speculation the Federal Reserve and the Department of the Treasury would ride to SVB’s rescue, confidence ran high and the bets would pay off.
“This was a no-brainer”
“This was a no-brainer,” Arentoft said.
Sure enough, by late Saturday, USDC had rebounded to 97 cents, and after the Feds disclosed a programme on Sunday to bail out depositors at SVB and Signature Bank, another mid-sized troubled lender, USDC touched 99 cents.
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Now all those investors who bought USDC at 88 cents are sitting pretty with tidy returns. All they have to do is redeem their token for greenbacks. Easy, right?
Maybe not. Now comes the rub — redemption. As it happens, Circle’s settlement banks may have limits on how many USDC tokens can be exchanged for dollars every day.
On Monday, Circle will be using a new partner bank — Cross River Bank in New Jersey — the stablecoin issuer’s CEO, Jeremy Allaire, said. If a wave of investors try and redeem at the same time, well, that could get sticky, Arentoft said. His worry is that in such a febrile market, a long wait to redeem could once again rattle USDC’s peg.
“We expect to see a big outflow from USDC and USDT into dollars as people have been speculating in the arbitrage opportunity over the weekend,” Arentoft said. “Today will be really important since we will see how the redemptions will unfold in regards to the stability of USDC.”
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It’s a test, and if it goes smoothly then the stablecoin market may be the stronger for it. If it doesn’t, and USDC wobbles, then the SVB-triggered crisis may enter a new chapter.
One theme that may pick up momentum is how stablecoin issuers manage risk compared to their TradFi counterparts, SVB and Signature.
Around 79% of the reserves supporting USDC are short-term Treasury bonds, according to Circle’s latest audit. SVB got into trouble because it had invested a huge portion of its balance sheet in long-term government debt, which has fallen in value as interest rates have risen.
The fallout from the demise of SVB is driving “increased awareness of the risks associated with the traditional banking system,” said Nagaking.
“One haunting irony of this situation is that USDC’s low-risk collateral profile – composed entirely of cash and short-dated bonds – was threatened by the poor risk management and questionable regulatory incentives of a traditional bank.”
Nagaking added: “This clearly contradicts the narratives spun by politicians and governmental agencies seeking to limit crypto access to US banking.”
Still, the vibe is optimistic. Bitcoin and Ethereum have each surged 9% in the last 24 hours. And Lido, the No. 1 DeFi protocol, has recorded an 8.3% jump in its deposits, or total value locked, to $9.4 billion, according to DeFiLlama.
The SVB collapse and its impact on markets “is ultimately going to be bearish for crypto in the short term as people become even more risk off, fiat on/off ramps are reduced and suck liquidity off of exchanges, and we see an increase in LPs demanding redemptions,” Tyler Reynolds, an angel investor in DeFi and former Google payments team manager, told DL News.
“Longer term, crypto should benefit from these bank failures as the realisation of the importance of self custody brings in a new wave of institutional users.”
Joanna Wright, Ritvik Carvalho, Eric Johansson and Tim Craig contributed to this story.
