Circle’s USDC Stablecoin Breaks Peg With $3.3 Billion Stuck at Silicon Valley Bank
A major cryptocurrency operated by Circle Internet Financial Ltd. meant to mimic the value of the U.S. dollar dropped sharply after the company said it had $3.3 billion tied up in the collapsed Silicon Valley Bank.
USD Coin fell below 87 cents on Saturday morning, according to data from CoinDesk. The virtual currency, known as a stablecoin, is designed to trade exactly at $1. It is backed by real U.S. dollars and short-term government debt, and sits at the heart of cryptocurrency trading.
Breaking its peg with the dollar has the potential to send shock waves through the cryptocurrency world still reeling from the collapse of FTX. For crypto traders, the decline in the value of USD Coin is reminiscent of the worst moments of the 2008 financial crisis when the Reserve Primary Fund, a money-market fund that most investors treated as the equivalent of cash, “broke the buck” in the wake of Lehman Brothers’ failure and saw its net asset value fall below $1.
The USD Coin reserves remaining at Silicon Valley Bank comprise about 8% of assets backing the token, according to Circle.
Circle holds $9.7 billion of its USD Coin reserves in cash and $32.4 billion in short-dated government securities, the company said in an update Saturday. The U.S. Treasurys backing USD Coin are held by BNY Mellon and managed by
BlackRock
Inc, Circle said.
Bank of New York Mellon Corp.
holds $5.4 billion of the USD Coin cash reserves and $1 billion is deposited at Customers Bank, according to Circle. The company said it uses
Signature Bank
for transactions and settlements, and has no exposure to
Silvergate Capital,
a crypto-focused bank that shuttered Wednesday.
Circle attempted to move reserves out of Silicon Valley Bank on Thursday, but those transfers had not settled as of Friday’s close, the company said. The firm believes those transfers could be processed Monday.
If the cash reserves at Silicon Valley Bank aren’t fully returned, Circle said it would cover any shortfall using company resources, including outside funding if necessary.
USD Coin inched higher to 98 cents after Circle posted the update, which also mentions that the firm will resume redemptions on Monday morning.
Another stablecoin, Dai, also broke from its $1 peg, trading as low as 90 cents Saturday. Dai, the fourth-largest stablecoin worth around $5 billion, is partially backed by USD Coin, also known by traders as USDC.
Like banks, stablecoins are subject to runs. If holders of the coins believe there aren’t enough dollars in reserve, they may rush to exchange their coins—or to sell them to someone else. That selling has driven down the price.
Cryptocurrency investors redeemed more than $2 billion in Circle’s stablecoin in the past 24 hours, according to blockchain data provider Nansen as of 10 p.m. ET on Friday. The pace of USD Coin redemptions accelerated through Friday, with most of the USD Coin burned in the last eight hours, Nansen said.
“Like other customers and depositors who relied on SVB for banking services, Circle joins calls for continuity of this important bank in the U.S. economy and will follow guidance provided by state and Federal regulators,” Circle said in a tweet late Friday.
Stablecoins such as USD Coin have become integral to cryptocurrency trading over the past two years. Traders prefer to buy and sell coins such as bitcoin using stablecoins, rather than using more volatile digital tokens or waiting days for trades made with government-issued currencies to settle.
Silicon Valley Bank’s collapse shows how a bank run can ripple to unexpected parts of the financial world. Just last month, the lender played down its exposure to the once hot, but now hobbled, digital currency space.
“We currently have minimal exposure to cryptocurrency and digital assets through loans to, deposits from and investments in clients engaged in those industries,” the bank wrote in its annual report published in February.
It was the inverse, the exposure of Circle to Silicon Valley Bank that mattered in this case.
Circle has portrayed itself as a sober player in the rough and tumble cryptocurrency world. It has tried to assure users of its safety by openly disclosing the composition of the dollars backing up USD Coin.
As with Silicon Valley Bank, Circle is a creature of the tech startup community. It earned early backing from Silicon Valley firms and later started its own Circle Ventures investment firm.
It also has deep ties on Wall Street. Circle has raised around $850 million from investors including asset manager
BlackRock Inc.,
Fidelity Management and hedge fund firm Marshall Wace.
Bank of New York Mellon Corp.
serves as the primary custodian for USD Coin reserves, according to Circle.
Circle called off an attempt to go public through a special-purpose acquisition company, or SPAC, in December but has said it was determined to list on public markets. It has also pushed for the Federal Reserve to regulate the stablecoin industry.
Last week, the Fed’s top banking regulator spotlighted stablecoins as a potential threat to financial stability and called on lawmakers to create legislation surrounding them.
Crypto exchange
Coinbase
paused conversions between USD Coin and the U.S. dollar over the weekend, the crypto exchange said Friday, citing heightened activity. The world’s largest crypto exchange Binance temporarily suspended its auto conversion from USD Coin to Binance USD, the firm said Friday.
Circle earlier Friday said Silicon Valley Bank was one of six banking partners used for managing a portion of its USD Coin reserves held in cash. The majority of USD Coin reserves are held in short-dated U.S. Treasurys, Circle Chief Strategy Officer
Dante Disparte
said on Twitter late Friday.
Some crypto executives questioned whether Circle has enough assets to cover its liabilities.
“Are you solvent?”
David Schwartz,
chief technology officer at crypto company Ripple, asked on Twitter in response to a post from Circle.
As the collapse of Silicon Valley Bank roiled the startup sector Friday, some crypto firms rushed to assure the public that they wouldn’t be affected by the failed bank. Binance, Coinbase,
Galaxy Digital
and Gemini said they have no banking relationship with Silicon Valley Bank.
Paolo Ardoino,
chief technology officer of Tether, said the issuer of the world’s largest stablecoin doesn’t have any exposure to Silicon Valley Bank. Tether has a market cap of around $72 billion, down from $74 billion late Friday, while USD Coin’s market cap is roughly $38 billion, down from about $41 billion, according to data from CoinMarketCap.
Some traders swapped other stablecoins for tether. Demand was so strong that tether traded slightly above its $1 peg on Coinbase, Binance and other exchanges.
“The big winner right now is tether,” said Austin Campbell, adjunct professor at Columbia Business School. “They are still functioning and liquid, traded above peg, and they don’t have exposure to SVB.”
Mr. Campbell, former head of portfolio management at stablecoin issuer Paxos Trust Company, said hedge fund traders are trying to price the recovery value of SVB and figure out how Circle is going to redeem when banks are open on Monday.
“If the hole is big enough, Circle may have to suspend redemptions or risk a sort of run themselves until they have certainty on the recovery amount,” he said.
In May, TerraUSD, a so-called algorithmic stablecoin fell below its fixed value of $1, triggering a selloff that also dragged down its sister token luna to zero. The demise of the two cryptocurrencies wiped out $40 billion of market value and set off a series of crypto collapses in 2022. The death spiral of TerraUSD, which also pushed tether down to as low as 96 cents, has shaken investor confidence in stablecoins and made them jittery about any signs of depegging that might kick off a crash.
Circle isn’t the only crypto company affected by the collapse of Silicon Valley Bank. Crypto lender BlockFi, which filed for bankruptcy in November, had roughly $227 million in unprotected funds at the bank, the U.S. Trustee, a unit at the Justice Department overseeing bankruptcies, said in a court filing Friday.
Circle launched USD Coin with Coinbase in 2018. The two companies have a revenue-sharing agreement on the interest income earned from reserves backing the stablecoin.
The rise in interest rates over the past year created a massive windfall for Circle because it pays no interest to the holders of USD Coin while keeping the interest earned on the bank deposits and government bonds Circle holds to back up the stablecoin.
Asked if Circle was a moneymaking machine in an interview in January, Circle founder
Jeremy Allaire
said, “It is.” He added: “Monetization really scaled up in 2022.”
—Patricia Kowsmann contributed to this article.
Write to Vicky Ge Huang at [email protected] and Hannah Miao at [email protected]
Corrections & Amplifications
One money-market fund saw its net asset value fall below $1 during the 2008 financial crisis, known as “breaking the buck.” An earlier version of this article incorrectly said more than one did. (March 11)
Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8
A major cryptocurrency operated by Circle Internet Financial Ltd. meant to mimic the value of the U.S. dollar dropped sharply after the company said it had $3.3 billion tied up in the collapsed Silicon Valley Bank.
USD Coin fell below 87 cents on Saturday morning, according to data from CoinDesk. The virtual currency, known as a stablecoin, is designed to trade exactly at $1. It is backed by real U.S. dollars and short-term government debt, and sits at the heart of cryptocurrency trading.
Breaking its peg with the dollar has the potential to send shock waves through the cryptocurrency world still reeling from the collapse of FTX. For crypto traders, the decline in the value of USD Coin is reminiscent of the worst moments of the 2008 financial crisis when the Reserve Primary Fund, a money-market fund that most investors treated as the equivalent of cash, “broke the buck” in the wake of Lehman Brothers’ failure and saw its net asset value fall below $1.
The USD Coin reserves remaining at Silicon Valley Bank comprise about 8% of assets backing the token, according to Circle.
Circle holds $9.7 billion of its USD Coin reserves in cash and $32.4 billion in short-dated government securities, the company said in an update Saturday. The U.S. Treasurys backing USD Coin are held by BNY Mellon and managed by
BlackRock
Inc, Circle said.
Bank of New York Mellon Corp.
holds $5.4 billion of the USD Coin cash reserves and $1 billion is deposited at Customers Bank, according to Circle. The company said it uses
Signature Bank
for transactions and settlements, and has no exposure to
Silvergate Capital,
a crypto-focused bank that shuttered Wednesday.
Circle attempted to move reserves out of Silicon Valley Bank on Thursday, but those transfers had not settled as of Friday’s close, the company said. The firm believes those transfers could be processed Monday.
If the cash reserves at Silicon Valley Bank aren’t fully returned, Circle said it would cover any shortfall using company resources, including outside funding if necessary.
USD Coin inched higher to 98 cents after Circle posted the update, which also mentions that the firm will resume redemptions on Monday morning.
Another stablecoin, Dai, also broke from its $1 peg, trading as low as 90 cents Saturday. Dai, the fourth-largest stablecoin worth around $5 billion, is partially backed by USD Coin, also known by traders as USDC.
Like banks, stablecoins are subject to runs. If holders of the coins believe there aren’t enough dollars in reserve, they may rush to exchange their coins—or to sell them to someone else. That selling has driven down the price.
Cryptocurrency investors redeemed more than $2 billion in Circle’s stablecoin in the past 24 hours, according to blockchain data provider Nansen as of 10 p.m. ET on Friday. The pace of USD Coin redemptions accelerated through Friday, with most of the USD Coin burned in the last eight hours, Nansen said.
“Like other customers and depositors who relied on SVB for banking services, Circle joins calls for continuity of this important bank in the U.S. economy and will follow guidance provided by state and Federal regulators,” Circle said in a tweet late Friday.
Stablecoins such as USD Coin have become integral to cryptocurrency trading over the past two years. Traders prefer to buy and sell coins such as bitcoin using stablecoins, rather than using more volatile digital tokens or waiting days for trades made with government-issued currencies to settle.
Silicon Valley Bank’s collapse shows how a bank run can ripple to unexpected parts of the financial world. Just last month, the lender played down its exposure to the once hot, but now hobbled, digital currency space.
“We currently have minimal exposure to cryptocurrency and digital assets through loans to, deposits from and investments in clients engaged in those industries,” the bank wrote in its annual report published in February.
It was the inverse, the exposure of Circle to Silicon Valley Bank that mattered in this case.
Circle has portrayed itself as a sober player in the rough and tumble cryptocurrency world. It has tried to assure users of its safety by openly disclosing the composition of the dollars backing up USD Coin.
As with Silicon Valley Bank, Circle is a creature of the tech startup community. It earned early backing from Silicon Valley firms and later started its own Circle Ventures investment firm.
It also has deep ties on Wall Street. Circle has raised around $850 million from investors including asset manager
BlackRock Inc.,
Fidelity Management and hedge fund firm Marshall Wace.
Bank of New York Mellon Corp.
serves as the primary custodian for USD Coin reserves, according to Circle.
Circle called off an attempt to go public through a special-purpose acquisition company, or SPAC, in December but has said it was determined to list on public markets. It has also pushed for the Federal Reserve to regulate the stablecoin industry.
Last week, the Fed’s top banking regulator spotlighted stablecoins as a potential threat to financial stability and called on lawmakers to create legislation surrounding them.
Crypto exchange
Coinbase
paused conversions between USD Coin and the U.S. dollar over the weekend, the crypto exchange said Friday, citing heightened activity. The world’s largest crypto exchange Binance temporarily suspended its auto conversion from USD Coin to Binance USD, the firm said Friday.
Circle earlier Friday said Silicon Valley Bank was one of six banking partners used for managing a portion of its USD Coin reserves held in cash. The majority of USD Coin reserves are held in short-dated U.S. Treasurys, Circle Chief Strategy Officer
Dante Disparte
said on Twitter late Friday.
Some crypto executives questioned whether Circle has enough assets to cover its liabilities.
“Are you solvent?”
David Schwartz,
chief technology officer at crypto company Ripple, asked on Twitter in response to a post from Circle.
As the collapse of Silicon Valley Bank roiled the startup sector Friday, some crypto firms rushed to assure the public that they wouldn’t be affected by the failed bank. Binance, Coinbase,
Galaxy Digital
and Gemini said they have no banking relationship with Silicon Valley Bank.
Paolo Ardoino,
chief technology officer of Tether, said the issuer of the world’s largest stablecoin doesn’t have any exposure to Silicon Valley Bank. Tether has a market cap of around $72 billion, down from $74 billion late Friday, while USD Coin’s market cap is roughly $38 billion, down from about $41 billion, according to data from CoinMarketCap.
Some traders swapped other stablecoins for tether. Demand was so strong that tether traded slightly above its $1 peg on Coinbase, Binance and other exchanges.
“The big winner right now is tether,” said Austin Campbell, adjunct professor at Columbia Business School. “They are still functioning and liquid, traded above peg, and they don’t have exposure to SVB.”
Mr. Campbell, former head of portfolio management at stablecoin issuer Paxos Trust Company, said hedge fund traders are trying to price the recovery value of SVB and figure out how Circle is going to redeem when banks are open on Monday.
“If the hole is big enough, Circle may have to suspend redemptions or risk a sort of run themselves until they have certainty on the recovery amount,” he said.
In May, TerraUSD, a so-called algorithmic stablecoin fell below its fixed value of $1, triggering a selloff that also dragged down its sister token luna to zero. The demise of the two cryptocurrencies wiped out $40 billion of market value and set off a series of crypto collapses in 2022. The death spiral of TerraUSD, which also pushed tether down to as low as 96 cents, has shaken investor confidence in stablecoins and made them jittery about any signs of depegging that might kick off a crash.
Circle isn’t the only crypto company affected by the collapse of Silicon Valley Bank. Crypto lender BlockFi, which filed for bankruptcy in November, had roughly $227 million in unprotected funds at the bank, the U.S. Trustee, a unit at the Justice Department overseeing bankruptcies, said in a court filing Friday.
Circle launched USD Coin with Coinbase in 2018. The two companies have a revenue-sharing agreement on the interest income earned from reserves backing the stablecoin.
The rise in interest rates over the past year created a massive windfall for Circle because it pays no interest to the holders of USD Coin while keeping the interest earned on the bank deposits and government bonds Circle holds to back up the stablecoin.
Asked if Circle was a moneymaking machine in an interview in January, Circle founder
Jeremy Allaire
said, “It is.” He added: “Monetization really scaled up in 2022.”
—Patricia Kowsmann contributed to this article.
Write to Vicky Ge Huang at [email protected] and Hannah Miao at [email protected]
Corrections & Amplifications
One money-market fund saw its net asset value fall below $1 during the 2008 financial crisis, known as “breaking the buck.” An earlier version of this article incorrectly said more than one did. (March 11)
Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8
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