Silicon Valley Bank Collapse : USDC and Dai stablecoins hit by a depeg

As a result of Silicon Valley Bank’s bankruptcy, Circle’s USD Coin (USDC) and MakerDao’s Dai stablecoins have lost their dollar peg.

Indeed, late Friday afternoon, Silicon Valley Bank (SVB) was shut down by US authorities as the financial institution was in the grip of a banking panic.

In early March, Circle said it held a portion of the USDC’s cash reserves – totaling about $9.8 billion – at Silicon Valley Bank as of January 17, 2023, but did not specify the amount. The sum was divided among several banks, including Bank of New York Mellon, Citizens Trust Bank, Customers Bank, New York Community Bank, Signature Bank, Silicon Valley Bank and Silvergate Bank, which was also closing this month.

The stablecoin issuer clarified the exact amount currently blocked at SVB on its Twitter account around 4:00 a.m. tonight.

Circle explained on Twitter that it had not managed to withdraw all of its deposits at Silicon Valley Bank (SVB).

$3.3 billion of USDC’s ~$40 billion in reserves are at SVB. Like other customers and depositors who depend on SVB for their banking services, Circle joins calls for continued operation of this important bank for the U.S. economy, Circle executives claimed.

Within an hour of the announcement, the stablecoin launched by the U.S. firm in partnership with Coinbase began losing parity with the dollar and its price eventually fell below $0.90.

DAI, a great stablecoin partly backed by USDC !

For its part, around 4 a.m., decentralized stablecoin DAI also began to lose parity with the greenback and eventually fell below $0.90 later in the morning. The token’s price has since rebounded and is currently trading around $0.94, according to data provided by CMC.

Unlike the USDC, which is backed by fiat currency and U.S. Treasury bills, the DAI is a so-called decentralized stablecoin. The token is backed by MakerDAO’s holdings including, among other things… USDC.

The entity was diversifying its reserves with a $500 million investment in traditional assets this fall to reduce its risk. This was apparently not enough to deal with the current market conditions and the problem faced by USDC.

“SVB’s unexpected collapse and USDC’s potential exposure to SVB created panic and people started fleeing to USDT,” Michael Egorov, founder of Curve Finance, commented on Bloomberg, noting that DAI, another major stablecoin, was “not a safe haven” because the token was partially backed by USDC. The latter also saw its anchor break early this morning in the wake of USD Coin’s problems.

To wit, Circle keeps most of the remaining (non-cash) USDC reserves in a fund managed by BlackRock that invests primarily in U.S. Treasuries.

SVB is now under the control of the U.S. Deposit Insurance Corporation, which is expected to reopen it on Monday under a new name. However, the FDIC only guarantees deposits up to $250,000 per customer per bank. From now on, the reimbursement of deposits above $250,000 will depend on the liquidation of the bank’s assets, opening a tedious and uncertain process.

To be continued…