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Circle, which operates one of the world’s largest stablecoins, has $3.3 billion of its reserves locked up in Silicon Valley banks as the cryptocurrency market reels from the collapse of two U.S. banks this week. announced that it was causing a decline in the value of the token.
Circle’s announcement on Friday night resulted in its USDC crypto token losing its peg to the dollar.
US exchange Coinbase has announced that it will temporarily suspend exchanges between USDC and the US dollar. Rival exchange Binance also announced that it would suspend automatic conversion of USDC to BUSD, Binance’s branded stablecoin.
The Circle called for an emergency federal relief plan for SVB.
SVB’s collapse, the second-largest bank failure in U.S. history, is beginning to trickle down to customers, further hurting the cryptocurrency market, which is still recovering from last year’s confidence crisis that brought down many major banks.
Earlier this week, Silvergate, a US bank that caters to crypto clients, announced it would scale back operations after deposits plummeted.
Stablecoins play an important role in connecting traditional and crypto markets, and traders use stablecoins for transactions just like cash or crypto-native dollars. Most track the value of major currencies, such as the dollar, on a one-to-one basis. Stablecoin operators typically earn interest from the traditional assets underlying their tokens, and their revenue increases with increased circulation.
According to the company’s data, Circle’s USD Coin is the second largest stablecoin in the cryptocurrency market, with $42 billion in circulation.
The company said it holds a quarter of its USDC reserves in cash with six partner banks, of which SVB is one. Most of the $40 billion in reserves is held in U.S. Treasury bills and other U.S. banks.
Circle said in a blog post on Saturday that USDC’s liquidity operations will resume during banking hours on Monday. The company added that if SVB does not return 100% of the deposit, it will utilize corporate resources, including external capital, as necessary.
“It’s not just cryptocurrencies themselves that are under pressure; the banks that support the industry are now collapsing themselves. “It’s a way for people to get in and out,” said Charlie Cooper, former chief of staff at the U.S. regulator, the Commodity Futures Trading Commission.
“Even the reserve-backed (stablecoin) model is under threat, calling into question the viability of the intersection of cryptocurrencies and traditional finance,” he said.
Dante Disparte, Circle’s chief strategy officer, warned on Saturday that the company is protecting stablecoins from a “black swan failure in the U.S. banking system.”
“SVB is a critical bank to the U.S. economy, and without a federal rescue plan, its failure will have far-reaching implications for businesses, banks, and entrepreneurs,” he tweeted.
Circle said it will continue to operate as usual while awaiting clarity from U.S. regulators on how SVB’s failure will impact depositors Circle and USDC. He did not immediately respond to a request for comment.
Since SVB’s collapse, USDC tokens have been trading as low as 88 cents on the dollar, according to industry price tracking website CoinMarketCap.
It was revealed that Circle held cash in multiple U.S. regulated financial institutions, including Silvergate and SVB.
