Circle to use Corporate Resources to Cover Reserves Shortfall after Silicon Valley Bank Shutdown
Circle, the payment company behind the USDC stablecoin, has announced that it will resume USDC liquidity operations when banks open in the United States on Monday morning, allowing USDC redemption at a rate of 1:1 with the U.S. dollar.
This announcement comes after USDC lost its $1 peg on March 11, briefly trading as low as $0.87 before re-pegging at $0.98.
USDC is the second-largest stablecoin with a market cap of over $42 billion as of January 31, serving as collateral for many stablecoin ecosystems. The depegging of USDC had an immediate effect on other stablecoin ecosystems. Following the shutdown of Silicon Valley Bank, Circle said it plans to use “corporate resources” to cover the shortfall on its reserves, according to a statement released on March 11.
Silicon Valley Bank shutdown
Silicon Valley Bank, one of the biggest lenders in the United States and a major player in venture-backed companies, was shut down by the California Department of Financial Protection and Innovation on March 10.
The Federal Deposit Insurance Corporation (FDIC) was appointed as the receiver to protect insured deposits. This shutdown led to fears about the future of Silicon Valley Bank and the stability of other financial institutions.
Circle claimed that Silicon Valley Bank suffered significant losses, leading to a situation where it was forced to sell long-duration assets to meet redemption demand. The settlement period on these assets caused a short-term liquidity crunch, leading to the FDIC stepping in to administer the bank.
In a statement, Circle asserted that Silicon Valley Bank is “a venerable and trusted partner to the U.S. innovation economy,” which suffered a “classic bank run, much like those we saw during the financial crisis in 2008. Few traditional banks have sufficient liquidity to withstand such a run.”
Relief efforts for Silicon Valley Bank were underway less than 72 hours after the collapse of the American tech bank. According to Bob Elliot, Chief Investment Officer of Unlimited Funds, “big banks [are] actively working on buying [Silicon Valley Bank] business.” The FDIC will cover 95% of uninsured deposits to the acquirer, and 50% of uninsured deposits will be paid out next week.
Fed/FDIC decisions on SVB determine whether they risk a bank run trillions of dollars in size.
1/3 of US deposits are in small banks and ~50% are uninsured. Haircutting SVB depositors will raise sensible questions about holding deposits at any small bank, risking a broader run. pic.twitter.com/RTCqekAQX4
— Bob Elliott (@BobEUnlimited) March 11, 2023
Circle’s Reserves and Auditing
Circle’s latest audit report from January revealed that USDC is 100% backed by cash and U.S. Treasuries, with nearly $8.6 billion held by U.S. banks as of January 31, representing roughly 20% of its reserves. Another $33 billion of its reserves are held in U.S. Treasuries managed by BlackRock through the Circle Reserve Fund, registered as a government money market fund and custody by BNY Mellon. The Big Four accounting firm Deloitte reviewed and certified the audit report.
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Conclusion
Circle’s announcement of the resumption of USDC liquidity operations has provided stability to the USDC stablecoin ecosystem. However, Circle’s latest audit report from January provides assurance that USDC is fully backed by cash and U.S. Treasuries, with a significant amount of reserves held in U.S. Treasuries managed by BlackRock.
The company’s plans to use “corporate resources” to cover the shortfall in its reserves following the Silicon Valley Bank shutdown have raised questions about the company’s and its reserves’ stability. The collapse of Silicon Valley Bank has also raised concerns about the stability of other financial institutions and the possibility of bank runs and liquidity crunches.
Andrey Kunev
Reporter at CoinsPress
Andrey Kunev is a knowledgeable cryptocurrency content creator passionate about the crypto market. With extensive experience in market analysis and investment reporting, Andrey is a valuable asset to the CoinsPress team. As a frequent contributor, he offers insightful and comprehensive coverage of market trends, price fluctuations, and new advancements in cryptocurrency. Whether you're a seasoned investor or just getting started, Andrey's clear and concise writing offers a comprehensive look at the current state of the crypto market and its prospects. Stay up-to-date with CoinsPress's expert analysis and commentary on all things cryptocurrency.
