The shockwaves of the collapse of SVB also reach the crypto market: the immediate impact was the fall of one of the stable currencies – the USD COIN (USDC), the second largest currency in the digital currency market. Throughout the weekend, the currency fell – when at its lowest its value reached only 88 cents (but since then it has stabilized and returned to a value of 96 cents). In addition to this, the leading currencies, Bitcoin and Ethereum, also fell sharply after the problems with the bank and the effects on the stablecoins became known.
What are the reasons for the resounding collapse of the USDC coin and what can it learn about the decentralized crypto market as a whole?
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What caused the fall of the decentralized currency?
The stable coins (Stablecoins) are not ordinary digital currencies, but they are backed by fiat currency – that is, currencies whose exchange rate is linked to some “real” currency – dollar, euro, etc. The stablecoins have become major players in the crypto world, and besides the obvious discomfort on the part of the regulator in the question of coverage – they guarantee a certain currency whose value is linked to the dollar or any other fiat currency, if at the moment of truth the company that issued it has the appropriate reserves to meet its obligations to the holders of the currency.
The USDC currency was backed by the dollar, and since 2008 it has maintained a one-to-one relationship with the American currency. In order to maintain the same relationship, the company that issues the digital currency – in this case the Circle company – has the backing of many dollars in real banks.
Like the various banks, these stablecoins are at the mercy of the market. Meaning, if the holders of the currency do not believe that there are enough dollars to back up the currency, they will choose to exchange it for another, more stable currency. Thus, when they flock to convert the currency, they actually cause the value of the currency to drop – as was the case with USDC.
The step that prevented the collapse of the currency
The Circle company, which as mentioned issued the USDC currency, stated that the Silicon Valley Bank (SVB Financial Group) holds $3.3 billion (out of a total of $9 billion) that it deposited with it. According to industry sources, in the 24 hours since the SVB crisis began, more than $2 billion was exchanged or converted – leading to a sharp plunge in the value of the decentralized currency, which fell more than 10% on Saturday to a low of 88 cents.
In response, CIRCLE announced that it was withdrawing its deposits from the bank. Later, the issuer also announced that it would continue to back the currency, which brought the value of the currency back to 96 cents per dollar – so it seems that investor confidence has not completely disappeared.
Adam Bennion, a founding partner of the venture capital fund Collider, tells Globes that in light of Circle’s quick response, the currency stabilized and returned to a value of 96 cents two days after its collapse.
“Ultimately, if the issuing company has enough capital, even if the market comes and says that the currency is worth 70 cents, the issuing company can say that it continues to bring one dollar for it, so that the currency maintains the stability of regardless of the market,” Benyon says.
The difficult period in crypto: one dizzying after another
Itai Avneri, deputy CEO of the digital assets trading company INX, refers to the connection between the crisis of traditional banks and the fall of the currency: “As soon as they started to fear the backup capabilities of the currency, you can see that it started to fall. There was pressure on the USDC following the crisis at SVB Bank which started this dive.”
The balance between the stability of traditional banks and the decentralized crypto world proves the connection between them and sometimes the mutual dependence on each other. Avneri offers a solution to the problem, which as we see it exists, and is self-custody – according to which companies hold their own collateral. This solution already exists in the worlds of digital securities.
The SVB crisis is not the only one to hit the crypto industry. The decentralized world continues to suffer from a trajectory of volatility, which has caused it to lose $2 trillion in total since November 2021. This volatility has caused a series of unusual events, such as the fall of the TerraUSD stablecoin and the collapse of Sam Bankman Freed’s FTX exchange.