Stablecoin USDC, Part of Crypto’s Bedrock, Is Caught in Silicon Valley Bank

USDC is a so-called stablecoin, whose value is pegged to one dollar. Stablecoin issuers such as Circle maintain the peg by keeping reserves in safe assets such as Treasurys and bank deposits. Silicon Valley Bank was one of six banks that Circle used, the company said. The company last week had withdrawn the last of the reserves it held at a seventh, Silvergate Bank, soon before that institution announced it would wind down operations.

Silicon Valley Bank “is a critical bank in the U.S. economy and its failure — without a Federal rescue plan — will have broader implications for business, banking and entrepreneurs,” said Circle Chief Strategy Officer Dante Disparte in a tweet Friday evening, adding that Circle was “protecting #USDC from a black swan failure in the U.S. banking system.”

Circle had made a wire transfer request on Thursday before the FDIC takeover, the company said, but it wasn’t processed.

Unlike prior crypto struggles—such as the failures of crypto lenders such as Celsius Network and Voyager Digital—the trouble at USDC strikes at what’s supposed to be the “boring” part of crypto. USDC and other stablecoins such as Tether are most often used by crypto traders as a sort of parking place between investments in more volatile tokens such as Bitcoin. Investors can easily send stablecoins between exchanges or move in and out of the coins almost instantly, without having to deal with banks that can sometimes take days to settle transactions.

Stablecoins maintain the peg by promising to always allow investors to redeem the tokens for traditional money deposited in a bank account, and regulators in the past have worried about how investors might react were some coins found not to have the reserves they promised.

As of March 9, Circle said it had $43.5 billion in reserves backing $43.4 billion in USDC tokens, meaning that any significant haircut to its deposits in Silicon Valley Bank would be more than enough to put the token underwater.

“Circle and USDC continue to operate normally,” a Circle spokesperson said earlier Friday.

It appears some token investors are already moving rapidly out of USDC.

The token’s price began to break away from the dollar on Friday afternoon, falling as low as 94 cents on the dollar, compared with its rival Tether. It fell as low as 88 cents as of 2:50 A.M. EST on Saturday, before recovering to about 91 cents later in the morning, according to CoinMarketCap.com. The token’s total market capitalization since 3 P.M Friday had fallen by $5.9 billion to $37.7 billion, indicating that investors are redeeming large amounts of the token.

USDC, which also shares revenues with trading platform
Coinbase Global
(ticker: COIN), had been widely seen as a more regulated alternative to Tether, the largest stablecoin at $73.7 billion. Any lack of faith in the coin could send more assets to Tether and contribute to volatility in the price of Bitcoin and other tokens as investors lose one of the main mechanisms they used to trade.

Falling assets at USDC could also hit Coinbase, which under an agreement with Circle shares a portion of the revenues that USDC’s reserves generate. Coinbase late Friday said it was “temporarily pausing” conversions between USDC and regular dollars over the weekend, citing heightened activity and the need to wait for dollar transfers from banks that clear during normal business hours.

Coinbase in the fourth quarter earned $182.2 million in interest income, which includes revenues from USDC, up from $7.6 million the year before, bolstered by rising rates. The firm in its annual report also said it held $861.1 million in USDC at the end of last year.

A Coinbase spokesperson declined to comment.

Write to Joe Light at joe.light@barrons.com