USDC has lost its peg to the dollar. This has caused concern among investors and traders as USDC is commonly used as a stable asset in cryptocurrency transactions.
It turned out that the largest bank, Silicon Valley Bank, which was responsible for the peg, no longer maintains this task.
As a result, many people are wondering about the future sustainability of USDC and its competitors USDT and DAI.
Before we talk about the loss of the USDC peg to the dollar and the role of Silicon Valley Bank in this process, let's remember what USDC is and how it is secured.
USDC is a stablecoin that was created by Circle in 2018.
The stablecoin is backed by US dollars at a ratio of 1:1. This means that for each USDC issued, an equivalent cash collateral must be set aside in US dollars.
Circle issues USDC through smart contracts on the Ethereum blockchain. The USDC collateral is held by the bank and audited by an audit firm to ensure its transparency and compliance.
The collapse of Silicon Valley Bank.
Silicon Valley Bank (SVB) is one of the largest US banks that specializes in working with cryptocurrency counterparties and companies in the IT sector, including Silicon Valley startups.
The bank recently announced an additional $1.75 billion share issue to strengthen its balance sheet.
However, such a move caused dissatisfaction with investors, who began to accuse SVB of insolvency.
The bank's attempts to reassure investors did not bring the desired result and led to even more panic in the market.
As a result, on March 9, the share price of the bank's parent company, SVB Financial Group, fell sharply by 60.41%.
It should be noted that the market was in a tense situation after the liquidation of another major financial counterparty - Silvergate.
What happened to USDC?
USDC has become the center of attention due to the loss of its peg to the dollar.
This came after it became known that Circle's funds were in Silicon Valley Bank, which announced an additional issue of shares for $1.75 billion.
As a result, the share price of SVB Financial Group fell by 60.41%, and Circle's reserves decreased, USDC lost 8%, and Coinbase stopped the USDC-to-USD exchange mechanism.
Major players such as Genesis, Galaxy, Bloctower, 0xsisyphus started pulling out of USDC causing liquidity to drain.
At the same time, 77% of USDC reserves are in short-term treasury for 1-4 months, which are stored in BNY Mellon and managed by Blackrock.
The remaining 23% of the funds are scattered among various banks, but in connection with the collapse of SVB, Signature may become an exception.
The situation with USDC remains tense, and investors continue to monitor developments.
USDT, DAI, USDD, BUSD... Who else?
After the events with USDC, the stablecoins USDT, DAI, USDD and BUSD also came under strong negativity from users who are worried about the safety of their money and choose cash.
Algorithmic stablecoin DAI was the most affected, as it is backed by 48% USDC and has a mathematical dependence on its rate.
Representatives of Tether (the issuer of USDT) deny any relation to Silicon Valley Bank, and claim that they do not store their money there, and that users are not at risk.
However, their relationship to Signature Bank remains unclear, as it is also at risk.
Will USDC remain relevant?
At the moment, many major players in the crypto market continue to buy USDC, as they believe in its recovery.
Various support measures have been taken recently, including significant amounts of funds deposited into USDC by companies such as Coinbase, Jump Trading, and FalconX.
Some experts also express confidence that the USDC will eventually fully recover to its par value.
However, there is another side of the story.
The loss of collateral may not lead to financial disruption for the company, but it will damage USDC's reputation. The question arises as to which DeFi protocol would trust a stablecoin that could suddenly be worth less than $1.
Who will risk and hold USDC when you need to use it during market stress? A stablecoin must always be pegged to the dollar in order to be usable, and that is literally what it means.
If Circle wants people to use USDC, they must protect its peg.
Conclusion.
The situation with USDC can have serious consequences for the entire crypto market and decentralized finance (DeFi) in general.
This raises questions about the reliability and sustainability of stablecoins and their collateral.
Many believe that stablecoins should not be dependent on a single bank or company, and should have a distributed collateral store.
Despite this, Tether continues to dominate the stablecoin market. Investors continue to favor USDT, which remains relatively stable at the moment. In any case, the situation with USDC reminds of the need for a more careful approach to choosing stablecoins and ensuring their safety. Crypto investors should be prepared for the fact that even stablecoins can run into problems and choose stablecoins based on the fundamentals and reputation of their issuers.