Why did the USDC lose its peg to the dollar overnight?

USDC loses dollar peg

Tonight, the second stablecoin in the cryptocurrency ecosystem, the USDC, lost its peg to the dollar. Indeed, depending on the data sources, it evolves when writing these lines to 0.90 dollar on CoinGecko, 0.897 on CoinMarketCap or 0.93 on the TradingView index. Its price is currently very volatile:

USDC Price on the TradingView Index

This event is not without reviving bad memories, recalling the beginnings of the fall of the UST. Before continuing, let us remind our readers that everyone should act according to their own convictionsand that it is not for us to advise to flee the USDC or on the contrary to take advantage of a possible arbitration.

To explain this panic, we must first turn to a broader phenomenon who is the banking panic in the united states. We saw it with Silvergate Bank, which was one of the USDC custodians, and which this week announced its intention to resort to liquidation.

Fortunately, Circle, the USDC issuer, had made arrangements by withdrawing its share of reserves at Silvergate already last week.

But yesterday, another banking player defaulted: Silicon Valley Bank (SVB). The latter was the subject of administrative closure, directly from the Californian branch of the Federal Deposit Insurance Corporation (FDIC). Gold, Circle held about 25% of its reserves with this player or around $10 billion, and the confirmation of the facts caused the market to panic:

Silicon Valley Bank is one of six banking partners Circle uses for managing the ~25% portion of USDC reserves held in cash. While we await clarity on how the FDIC receivership of SVB will impact its depositors, Circle & USDC continue to operate normally.https://t.co/NU82jnajjY

— Circle (@circle) March 10, 2023

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What will happen now?

Factually, it is impossible at this time to say whether the USDC will be able to overcome this panic and regain its footing. What is certain is that Circle attempted to take action by withdrawing cash from SVBbut confirmed early this morning that 3.3 billion dollars were still blocked with this actor:

2/ Like other customers and depositors who linked 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 (@circle) March 11, 2023

Nevertheless, it would still seem that these funds are safe. And for good reason, it is precisely to ensure the integrity of the deposits of SVB customers. that the FDIC has shut it down. As of December 31, Silicon Valley Bank had 175.4 billion in deposits from all of its customers. Insured actors should have access to their funds on Monday:

“All insured depositors will have full access to their insured deposits no later than Monday morning, March 13, 2023. The FDIC will pay uninsured depositors an early dividend over the next week. Uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured funds. »

As for Circle, it must now rely on five other players who manage its deposits, including Bank of New York Mellon (BNY Mellon). This diversification was precisely there to prevent such risks.

Regarding stablecoins, if the algorithmic models showed their flaws last year, the centralized models also prove that they are not infallible, and that they are exposed to the risk of default by other centralized intermediaries, like the whole banking industry.

👉 Read also – Understanding the importance of the Silvergate case and its impact on the cryptocurrency ecosystem

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Sources: FDIC, TradingView