Stablecoin is in the crisis mode.
The most reputable stablecoin USDC is depegged.
It is all triggered by the traditional bank collapse — Silicon Valley Bank or SVB collapse.
Why traditional bank collapse impacts crypto stablecoin?
Let’s sort this out and reveal how stablecoin operates.
First, why SVB collapse?
The short answer is overleveraged.
SVB is one of the 20 largest commercial banking in the United States. Some even estimate the bank owned half of startup assets.
Bank operated in a fractional sense which they got no money to cover when everyone tried to withdraw all their money at once.
Although such even is rare, it can happen.
FDIC is a government insurance plan to prevent bank runs per each account up to $250K and to avert panic withdraw to protect customers’ funds.
Of course, when customers deposit more than $250K in the bank, there is no insurance to recover the rest.
Risky as it sounds, that is why SVB collapses because there is no money to recover beyond $250K insurance plan.
Second, Circle is the company behinds stablecoin USDC.
The company Circle has a $3.3B deposit in SVB.
Circle announced that SVB is one of the six banks that held up to ~25% of the cash of reserve for Circle stablecoin.
We know that around 8.25% in cash stuck in SVB and they were all gone.
Circle has $3.3B out of a total $40B short to peg 1:1 of the US dollar which means 1 dollar of USD gives 0.9175 of USDC.
If it means you got 8.25c short of each dollar, if you own USDC.
That is why many crypto exchanges suddenly pause the USCD/USD trade and wait for the Monday of bank opening.
Why wait for Monday?
SVB is gone and money is all gone. However, FDIC insurance will kick in Monday to recover a portion of the loss and possibly recover some more from the Circle.
Thus, crypto exchanges are reluctant to risk losing their money during the weekend and USDC’s reputation can no longer…