Why is the USDC Stablecoin Depegged?

The collapse of Silicon Valley Bank, the second largest bank collapse in American history, has caused Circle’s USDC stablecoin to depeg and trade at around 90 cents before recovering to around 94 cents. $3.3 billion in USDC reserves were stored at the bank, causing panic to take over and decrease the price of USDC to its all-time low. Let’s look at what happened, if USDC will recover, and how investors can bet on the continued fall or return to peg.

On Friday, March 10th, Silicon Valley Bank, the 16th-largest bank in the United States, was forced to shut down by regulators due to fears about insolvency. As one of the biggest lenders to technology companies and startups, the bank faced losses due to the recent decline in the tech sector. One of the companies using the bank’s services was Circle, the company behind the USDC stablecoin.

USDC is a centralized and fully collateralized stablecoin, meaning that for every 1 USDC there is $1 of cash equivalents backing it. 25% of USDC’s backing is held in cash reserves, and the other approximately 75% is held in Treasury bills custodied by BNY Mellon. The cash reserves are split between six banks, one of which was Silicon Valley Bank. With around $40 billion in funds, the SVB collapse resulted in the loss of $3.3 billion in cash reserves for Circle and USDC.

Naturally, this loss in reserves immediately impacted the price of USDC, which initially fell to around 97 cents before continuing to tumble to a current price slightly above 94 cents. This could have far-reaching implications for the market, as USDC is typically seen as one of the safest stablecoins and one that many DeFi protocols utilize. 

Even though USDC appears to be in an unfortunate position, things may not be as harrowing as they appear at first glance. Most of USDC’s downward price action seems to be from panicked USDC holders selling and insufficient liquidity to fulfill all trades at the fair USDC price. For example, Coinbase is not allowing USDC trades, and Binance suspended their USDC trading pair. The extra sell pressure proved too much for the market to handle.

Additionally, some analysts speculate that the government will restructure SVB and its assets under a different bank instead of letting them entirely collapse. The government is known for bailing out banks under challenging situations and facilitating restructurings, especially when banks are closed on Friday and reopened on Monday. Tomorrow we will know whether or not SVB will follow this standing trend.

There are several ways to speculate on USDC’s future price action. The easiest is simply buying USDC at a discount and hoping it eventually returns to peg. Other options include shorting or going long on the asset on a futures or perpetuals exchange or using a decentralized money market like Aave to take out a collateralized position.

Even though this is a less-than-ideal situation, it will likely turn out fine for any USDC holders. As the most established, regulated, and reputable stablecoin, USDC will probably be able to make its peg whole and return to business as usual. If this does not happen, the entire market will have a massive issue that could result in several negative consequences, including greater stablecoin regulation, the collapse of some DeFi protocols, and a general increased negative perception of the Web3 industry. It may be counterintuitive for the cryptocurrency industry to hope for government intervention, but in this case it seems necessary.

By Lincoln Murr

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