Unless you have been living under a financial rock, you must have noticed the downfall of the SVB bank. It’s one of the three banks that went down in quick succession. However, SVB also caused the USDC stablecoin to de-peg. Are there any other consequences you should know about?
So, let’s dive in and see how the SVB collapse affected USDC. We will also look at other possible consequences.
1/ Silicon Valley Bank (SVB) was shut down this past Friday, impacting @circle‘s $USDC, which held approximately $3.3B of its cash reserves with SVB.
What happened to Silicon Valley Bank (SVB), @circle‘s $USDC, and what are the implications on DeFi?🧵 pic.twitter.com/5KRjhCwAgB
— Messari (@MessariCrypto) March 13, 2023
What Happened to Silicon Valley Bank?
Here’s a short recap of what happened to the Silicon Valley Bank during last week. The bank has been around for a good 40 years. Last week, it was also the 16th largest bank in the United States. Its worth was around $200 billion.
During the recent pandemic, the services of the bank were in high demand. Tech companies and startups had golden times. A lot of these companies deposited their money in SVB. They used this money for payrolls and other expenses. On the other hand, the bank used most of these deposits for investments.
Here is where it becomes tricky. SVB invested in long-dated U.S. government bonds. This was two years ago. At the time, they were safe investments. However, bonds react to interest rates by losing value. So, once the Fed (Federal Reserve) started to raise interest rates, SVB’s bonds started to lose value. The maturing of these bonds was still years away. That’s when SVB would receive its money back.
In the meantime, many tech companies started to take out their deposits. Economic circumstances triggered this. So, once SVB started to run out of liquidity, it started to sell off some bonds. However, at a steep loss. As a result, investors lost trust in the bank. The ensuing bank run took down SVB within 48 hours. On the 8th of March, the bank announced the raising of $1.75 billion in capital. On March 10th, the bank closed its doors. This meant that after Washington Mutual in 2008, we saw the second-largest bank failure in the U.S.
Late on Sunday evening, U.S. time, U.S. agencies stepped in. They guaranteed that they would cover all deposits. In other words, customers could get their deposits on Monday morning, March 13th.
How Did This Affect the USDC Stablecoin?
Circle is the company behind the USDC stablecoin. It held around $3.3 billion worth of their reserves in SVB. Their total reserves are around $40 billion. The bank run on SVB, and the surrounding panic, made USDC lose its peg. It dropped to $0.87.
Circle uses this money to back the USDC’s value. If Circle loses this money, it will mean a serious financial hit. This also affected another stablecoin, the DAI. Simply, because USDC is an important backer of the DAI stablecoin. As a result, the DAI also lost its peg over the weekend.
However, both have recovered completely, and they currently peg again to the USD. The picture below shows precisely where USDC lost the peg. It also shows where it regained the peg again. This chart shows the last seven days. The DAI profile looks similar.
What Are the Potential Consequences?
One of the consequences we may see is liquidity issues in the crypto industry. Besides SVB, the Silvergate Exchange Network (SEN) and the Signature Signet also collapsed. All three faced issues during a similar time frame. They also had many crypto customers and users. To clarify, the three banks offered 24/7 services for settlement. They were also the three biggest in the banking industry to offer these services for crypto.
This explains why the crypto industry may face liquidity issues. SEN and Signet were some of the most important facilities in the U.S. for crypto. They offered to handle fiat payments during weekends. So, until other banks fill this gap, the liquidity issue will remain.
Another, more positive consequence, is that Bitcoin becomes a safe haven. This could also count for gold, by the way. The more issues the banking system faces, the more popular Bitcoin becomes. Over the last three days, we saw Bitcoin rise from around $20,000 to almost $25,000. See the tweet below by Kevin Svenson.
2023 Bank Run 🏦🏃| The Rise of #Bitcoin #BTC #Bankcollapse pic.twitter.com/s5YSBKXMkA
— Kevin Svenson (@KevinSvenson_) March 13, 2023
We looked at what happened at the SVB bank over last week. This included how it affected the USDC stablecoin. Last but not least, we looked at some potential consequences for the crypto industry. This banking drama is not over yet. We will follow this up with another article. In this, we look further into what kind of impact the Silvergate, Signature, and SVB demise can have on crypto.
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