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Sunday April 21, 2024

Second-largest bank failure in US history sparks cryptocurrency chaos

Circle that created USDC said it had been unable to withdraw its reserves from SVB, whose sudden collapse rattled financial market

By AFP
March 12, 2023
An illustration picture taken in London on May 8, 2022, shows a gold plated souvenir cryptocurrency Tether (USDT) coin arranged beside a screen displaying a trading chart. - Tether (USDT) is an Ethereum token known as a stablecoin that is pegged to the value of the US dollar, and is currently the largest stablecoin with a market value of USD 83 billion dollars. AFP/File
An illustration picture taken in London on May 8, 2022, shows a gold plated souvenir cryptocurrency Tether (USDT) coin arranged beside a screen displaying a trading chart. - Tether (USDT) is an Ethereum token known as a stablecoin that is pegged to the value of the US dollar, and is currently the largest stablecoin with a market value of USD 83 billion dollars. AFP/File

NEW YORK: The supposedly "stable" cryptocurrency USDC fell sharply after the firm that created it, Circle, announced it holds $3.3 billion in failed Silicon Valley Bank (SVB) and has dropped its peg to the dollar.

Circle said late Friday it had been unable to withdraw its reserves from SVB, whose sudden collapse rattled financial markets.

The Federal Deposit Insurance Corporation on Friday took over SVB, a major lender to the tech world, in the second-largest bank failure in US history.

SVB is expected to reopen on Monday under a new name, with billions in customer deposits now under FDIC control.

The FDIC guarantees deposits -- but only up to $250,000 per client and per bank.

The agency said Friday it would provide certificates to customers with uninsured funds -- those above the $250,000 limit -- so that they would be the first to receive funds eventually recovered while the bank is in receivership.

But the process of liquidating the bank’s assets can be long, with no certainty of just how much will be recovered.

The USD Coin, or USDC, was launched in 2018 as a "stablecoin," meaning it was indexed to a currency backed by a central bank, in this case the US dollar.

It is listed as the second largest "stable" currency worldwide, based on its volume in circulation (around $40 billion), behind Tether.

Stablecoins are supposed to be backed by equivalent reserves in immediately available assets, either cash or readily convertible financial securities.

Overnight Friday to Saturday, the USDC fell to its lowest level ever, dropping to 87 cents before recovering to around 94 cents.

Other stablecoins have also suffered.

The Dai, the fourth-largest stablecoin by volume in circulation, fell to 95 cents, while the Frax (sixth largest) fell to 94 cents, its lowest ever.

The Coinbase cryptocurrency exchange platform said it was suspending USDC-dollar conversions until Monday, given its exceptionally high activity.

More than $25 billion in USDC had been exchanged on the Coinbase platform in 24 hours, an enormous volume compared to overall holdings.

Meantime, Binance, the largest cryptocurrency transaction site, said it was suspending conversions of USDC into BUSD -- Binance USD, the platform’s own "stable" currency.

"Like other customers and depositors who relied on SVB for banking services, Circle joins calls for continuity of this important bank in the US economy and will follow guidance provided by state and Federal regulators," Circle said in a statement.

Withdrawal orders from SVB reached a breathtaking $42 billion in a single day on Thursday, according to the California Department of Financial Protection and Innovation.

When the bank was unable to honor all those requests, the FDIC stepped in to take control.