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by Tyler Durden
Saturday, Mar 11, 2023 – 01:04 PM
Yesterday afternoon, after the equity market close, USD Coin (USDC) issuer Circle revealed that $3.3 billion of its $40 billion reserves were tied up in now-failed Silicon Valley Bank (SVB).
Specifically, on March 9, Circle initiated a wire transfer to remove its funds from SVB as the FDIC-insured bank was about to shut operations. However, two days later, on March 11, Circle confirmed that the wire transfers were not wholly processed, with $3.3 billion of USDC reserves still with SVB.
2/ Like other customers and depositors who relied on SVB for banking services, Circle joins calls for continuity of this important bank in the U.S. economy and will follow guidance provided by state and Federal regulators. — Circle (@circle) March 11, 2023
Almost immediately, leading crypto exchanges Binance and Coinbase both said that they would temporarily suspend USDC conversions as the contagion from the collapse of SVB plays out.
Citing “current market conditions” without naming Silicon Valley Bank, Binance said it has temporarily suspended auto-conversion of USDC to BUSD.
Binance has temporarily suspended auto-conversion of USDC to BUSD due to current market conditions, specifically related to high inflows & the increasing burden to support the conversion.
This is a normal risk-management procedural step to take while we monitor the situation. — Binance (@binance) March 11, 2023
Coinbase, the largest cryptocurrency exchange in the United States, also said it would suspend USDC conversion to USD while banks are closed over the weekend.
We are temporarily pausing USDC:USD conversions over the weekend while banks are closed. During periods of heightened activity, conversions rely on USD transfers from the banks that clear during normal banking hours. When banks open on Monday, we plan to re-commence conversions. — Coinbase (@coinbase) March 11, 2023
USDC prices fell almost immediately, dramatically breaking the $1 peg, trading as low as 87c to the $1 at one point but currently ‘stabilized’ around 90c.
As CoinTelegraph reports, according to Dante Disparte, the chief strategy officer and head of global policy for Circle, SVB is critical to the United States economy and warned that “its failure – without a federal rescue plan – will have broader implications for business, banking and entrepreneurs.
“As with Silvergate, our teams have worked at speed to limit any exposure to banks. This includes a wire transfer request made before SVB’s FDIC receivership. A $3.3 billion cash exposure remains — but we follow state and federal regulatory guidance.”
Crypto investors redeemed more than $2 billion in Circle’s stablecoin in the past 24 hours, according to blockchain data provider Nansen as of 10 p.m. ET on Friday. The pace of USD Coin redemptions accelerated through Friday, with most of the USD Coin burned in the last eight hours, Nansen said.
As WSJ reports, some crypto executives questioned whether Circle has enough assets to cover its liabilities.
“Are you solvent?” David Schwartz, chief technology officer at crypto company Ripple, asked on Twitter in response to a post from Circle.
Paolo Ardoino, chief technology officer of Tether, said the issuer of the world’s largest stablecoin doesn’t have any exposure to Silicon Valley Bank.
Tether has a market cap of around $72 billion, down from $74 billion late Friday, while USD Coin’s market cap is roughly $38 billion, down from about $41 billion, according to data from CoinMarketCap.
Additionally, following USDC’s depegging, the stablecoin ecosystem immediately came under pressure, as DAI, USDD and FRAX also depegged from the U.S. dollar.
Finally, as CoinDesk notes, if SVB customers, including Circle and its USDC stablecoin, are forced to take a haircut on their money, the repercussions are unclear.
In fact, as Colin Wu writes at Substack, USDC’s fate may indeed depend on whether Silicon Valley Bank can be acquired…
The bad news is that the fate of USDC is not determined by Circle but by Silicon Valley Bank.
If a large financial institution ultimately chooses to acquire Silicon Valley Bank, the illiquidity and bank runs faced by Silicon Valley Bank and Circle will also be resolved. However, if Silicon Valley Bank is ultimately bankrupted and liquidated, although it still has a strong debt-paying ability literally from the current balance sheet, the final outcome is not optimistic considering the potential massive losses from asset liquidation. Circle cannot guarantee that it will receive $1.5 billion or more. Moreover, the liquidation of a bank is too long to wait, and Circle cannot wait for that long now!
If Silicon Valley Bank is ultimately liquidated, Circle’s liquidity losses of $3.3 billion will be confirmed immediately. Although the loss of $3.3 billion seems to account for only 8% of total assets, from the perspective of accounting views, it is enough to make Circle’s net assets below zero. Currently, Circle’s liability side (stablecoins in circulation, valued at 1:1 US dollar) is $44.5 billion, while the asset side (cash reserves and short-term bonds) is only $44.6 billion. This means that a $3.3 billion cash reserve loss will completely turn USDC into a company with net assets of -$3.2 billion. Whether there exist companies in today’s Silicon Valley and Wall Street that are willing to accept such a company on the brink of bankruptcy is a big question. After the FTX go bankrupt, I believe that white knights will be more cautious in considering high capital cost in current economic environments before extending a helping hand.
If Silicon Valley Bank is not eventually subject to bankruptcy liquidation, Circle’s $3.3 billion loss will not be finally confirmed. In that case, the price of USDC will quickly return to its normal price (1USDC:1USD), or even a temporary premium caused by short-squeezing.
As for whether Silicon Valley Bank will ultimately be acquired, I hold an uncertain attitude, with the probability being roughly between 50% and 50%. The motivation for acquisition is very clear, namely to rebuild market confidence in financial institutions, avoid risks spreading further between banks and companies, and ensure that the financial system is robust enough to continue raising interest rates. The reason for not being acquired is also very simple: Silicon Valley Bank is not a systemically important bank, unlike Bear Stearns or Merrill Lynch. It is only a regional small and medium-sized bank and will not affect the overall financial system’s stability.
But I prefer to believe that facilitating an acquisition will be the most critical task for the Fed and the New York Fed this weekend. The Fed will not stop raising interest rates until it achieves its price stability target. For now, they are more afraid of being caught in a dilemma: fully raising interest rates (50 basis points) would resonate with Silicon Valley Bank’s bankruptcy and cause more small and medium-sized bank runs; insufficient interest rate increases (25 basis points) would deviate from the equilibrium interest rate and be difficult to control overheating of the economy, possibly leading to the worst scenario of wage and price spirals. To avoid this problem, the Fed’s only option now is to minimize the impact of Silicon Valley Bank’s bankruptcy on the overall economy, encourage the acquisition through mediation, and reach the equilibrium interest rate based on economic data.
And it can be certain that so far, large banks’ cash reserves are relatively sufficient and have enough strength to acquire Silicon Valley Bank.
We do believe the final fate of Silicon Valley Bank will be announced to the public before the opening of the Asian stock market on Monday. And its fate will also directly affect the final judgement of Circle and USDC.
So who, if anyone, will step in?
When Razer CEO Min-Liang Tan tweeted late Friday that Twitter should buy SVB and turn into a digital bank, billionaire Elon Musk tweeted in reply, “I’m open to the idea.”