The price of USDC, the stablecoin issued by Circle, an American cryptocurrency company, plummeted and was severely decoupled from the US dollar. This was mainly affected by the company's cash reserves of US$3.3 billion stored in the failed Silicon Valley Bank (SVB). Silvergate's thunder was not digested, and Silicon Valley Bank (SVB) came soon after. SVB's total assets are US$212 billion, ranking 20th among banks in the United States, and its size is 10 times that of Silvergate.

The greater impact of the run on SVB is that it is almost the only bank for funds and venture capital companies in Silicon Valley. SVB Silicon Valley Bank is an innovative bank. For example, its loan portfolio is as follows: the vast majority (56%) is financing for PE/VE institutions, including co-investment financing for GPs; VC primary market bridge financing, etc.; 14% of the loans are for high-net-worth entrepreneurs (stock financing/buying boats/houses); 12% are for mid- to late-stage startup financing, which traditional banks dare not touch. Let’s take a look at the trigger of the whole thing. The 21 billion bonds that were just auctioned at a discount belong to the overall 117 billion US dollars of AFS HTM’s treasury bond/quasi-treasury bond portfolio.

SVB only has 7% cash (14 billion), and the remaining liquidity basically relies on the government bond portfolio (117 billion). Deposits need to pay higher interest to savers, while government bonds face the prospect that returns cannot keep up with interest rate increases.

Affected by the imminent collapse of Silicon Valley Bank in the United States, the crypto market fell across the board. Bitcoin fell below $20,000, hitting a new low in the past two months. The U.S. dollar stable currency USDC broke down and fell to a low of $0.88.

Why is this happening? how so?

It turns out that USDC had $3.3 billion (8.25%) of its total reserves stored in Silicon Valley Bank, and on Thursday afternoon and Friday morning, the bank suffered a run on it due to concerns from SVB investors and startups, and was immediately The FDIC (Federal Deposit Insurance Corporation) took over.

Background on Circle and USDC Circle is a company that issues the crypto-stable currency USDC. USDC, launched in 2018, is a so-called "stable currency", which is a cryptocurrency linked to the national legal currency. In the case of USDC, it maintains a 1:1 stable link with the US dollar. Under the mechanism of USD coin (USDC), they peg their token to one US dollar, collateralizing their circulating supply of over 40 billion by holding approximately $40 billion in reserves.

The fact that the current fully diluted market cap of $38.7 billion does not match the circulating supply of 40.8 billion USDC tokens is a very bad thing and means that USDC no longer functions as a stablecoin.

USDC depegs At around 6pm ET, the market began to shake, with trading volume steadily rising, and USDC starting to break away from its $1 peg. When Circle officially announced their $3.3 billion on Friday, March 10, 2023 at 10:11 pm, the situation was completely out of control.

By 11pm ET, the trading price had dropped to $0.95, and by 3am Saturday morning, the price hit $0.88.

After over a year of extremely stable trading prices, suddenly the market was hit by a huge sell-off. To avoid exposure to the risks of SVB, traders quickly turned to other stablecoins such as Tether – which at one point reached $1.06!

What happens next?

Will we see Circle crash in the same rapid manner that we saw SVB itself crash? A recent tweet claimed that Silicon Valley Bank is one of six banking partners Circle uses to manage around 25% of USDC’s cash reserves. While we wait for SVB to be taken over by the FDIC and figure out how that will impact its depositors, Circle and USDC continue to operate normally.

In addition, according to the latest data from Circle’s official website as of March 9, the current circulating market value of USDC is approximately US$43.4 billion, and USDC reserves total US$43.5 billion. Among them, cash reserves are $11.1 billion, accounting for about 25%, and the other $32.4 billion (75%) of reserves are short-term U.S. Treasury bond investment portfolios.

Personal opinion: The emergence of USDC and BUSD restrictions reflects changes in the regulatory environment, and the future development of stablecoins may be subject to more regulatory restrictions and constraints. However, the importance of stablecoins in the cryptocurrency market cannot be ignored as they provide a stable store of value for digital currencies.

In the future, the development of stablecoins may develop in the following directions:

1. Tougher Regulation: As regulators increasingly regulate the cryptocurrency market, stablecoins may require stricter supervision. This may include restrictions on stablecoin issuers, reserve assets, and issuance amounts.

2. More diverse stablecoin types: Currently, most stablecoins are based on the US dollar, but more types of stablecoins may appear in the future, such as stablecoins based on other fiat currencies or a basket of currencies. This will increase the diversity and flexibility of stablecoins and better adapt to the needs of different regions and markets.

3. Better reserve asset management: The value of stablecoins depends on the quality and management of reserve assets. In the future, stablecoin issuers may pay more attention to the security and transparency of reserve assets and adopt better asset management methods to ensure the value stability and sustainability of stablecoins.

4. More decentralized stablecoins: Current stablecoins are mainly issued and managed by centralized institutions, but more decentralized stablecoins may appear in the future. This will increase the decentralization of stablecoins and user trust, but may also bring some technical and security challenges.

In general, the future development of stablecoins will be affected by various factors such as the regulatory environment, market demand, and technological innovation. As the cryptocurrency market continues to develop and mature, stablecoins will continue to play their important role and may play an even more important role in the future digital currency economy.