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Crypto chaos: Three banks collapse, USDC stablecoin wobbles

Crypto chaos

The second-biggest collapse of a US bank ever has caused chaos for crypto markets over the weekend, with stablecoin USDC de-pegging dramatically from the dollar and questions being asked about the prospects of tech startups facing cashflow disruptions.

The collapse of Silicon Valley Bank (SVB) was bookended by regulators shutting down two other crypto-related banks, Silvergate and Signature, over the past four days.

US authorities moved to shore up confidence in the banking system on Sunday, guaranteeing access to full deposits for SVB and Signature customers. Earlier, the lead company behind USDC, Circle, had reassured markets by saying it would find replacement funds for the $3.3b hole SVB’s collapse had left in its cash reserves.

Before the reassurances, USDC dipped as low as 88 cents, a big problem for a product whose utility is based on equity with the dollar.

The story continues to develop, with no one sure what will happen when US markets open on Monday morning and whether the trouble could spread further.

How stablecoins work

Fiat stablecoins like USDC work by the issuer holding assets exactly equivalent to their total worth, in this case around $43b. Any value discrepancy arising between USD and USDC should in theory be quickly eliminated by the market picking up easy wins and self-correcting.

This mechanism broke when SVB collapsed and it wasn’t clear how much of USDC’s reserves were held there: a crisis of confidence, that as at time of writing had not entirely evaporated despite Circle’s statements and the government deposit guarantee. USDC is currently trading just under parity with the dollar.

The collapse of SVB is not attributable to crypto: it collapsed because of an old-fashioned run on deposits, set off by a crisis in confidence caused by the undermining of its low-interest rate business model. See this article for a good explanation.

Signature and Silvergate, on the other hand, were deeply involved in financing crypto. Signature runs the Signet real-time crypto payments platform, and it is not yet known what will happen to this service in the wake of regulators stepping in.

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Polemos staff

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