Circle, the operator of one of the largest stablecoins in the world, has said $3.3bn of reserves are trapped in the Silicon Valley Bank, triggering a fall in the value of the token as the crypto market reels from the failure of two US banks this week.
The announcement from Circle overnight on Friday caused the company’s crypto token USDC to lose its peg against the dollar.
The US exchange Coinbase said it temporarily paused the conversion between USDC and US dollars. Rival exchange Binance also said it would pause the automatic conversion of USDC to BUSD, the stablecoin that carries the Binance branding.
Circle calls for urgent federal rescue plan for SVB.
The collapse of SVB, the second-biggest bank failure in US history, has begun to attract customers, a further blow to the crypto market which is still recovering from last year’s crisis of confidence that took out many of the biggest names.
Earlier this week, Silvergate, a US bank that has been courting crypto customers, said it would cease operations after deposits.
Stablecoins play an important role in connecting traditional and crypto markets, and traders use them like cash or crypto-native dollars to make trades. Most track the value of major currencies such as the dollar one-to-one. Stablecoin operators typically earn an interest in the traditional asset underlying the token, with a higher supply in circulation increasing their revenue.
Circle’s USD Coin is the second largest stablecoin in the crypto market with $42bn in circulation, according to company data.
The company said it holds a quarter of its USDC reserves in cash with six banking partners, namely SVB. The majority of the $40bn reserve is held in US government bonds and other US banks.
In a blog post on Friday, Circle said USDC liquidity operations will resume when banks open on Friday. The company added that it will use the company’s resources, involving external capital if necessary, if SVB does not return 100 percent of its deposits.
“It’s not just cryptocurrencies themselves that are under pressure: now the banks that support the industry are failing. And stablecoins like USDC are a way in and out of crypto for many investors,” said Charley Cooper, former chief of staff at the Commodity Futures Trading Commission, a US regulator .
“Threats are even supported by reserves [stablecoin] models have questioned the viability of the intersection between crypto and traditional finance,” he said.
Dante Disparte, Circle’s chief strategy officer, warned on Friday that the company is protecting its stablecoin from a “black swan failure in the US banking system”.
“SVB is a critical bank in the US economy and its failure – without a Federal rescue plan – will have wider implications for business, banking and entrepreneurs,” he tweeted.
Circle said it will continue to operate normally while waiting for clarity from US regulators on how the failure of SVB will impact its depositors, Circle and USDC. It did not immediately respond to a request for comment.
Since SVB’s collapse, the USDC token has traded as high as 88 cents on the dollar, according to industry price tracking website CoinMarketCap.
Circle held cash in several US regulated financial institutions, including Silvergate and SVB, has been disclosed.