Circle promises to cover ‘any shortfall’ in backing for USDC

Circle uses corporate funds and “external capital” to support USD Coin (USDC) if it is unable to timely and fully return part of the stablecoin reserves held on accounts at Silicon Valley Bank.

Sharing an Update on USDC and Silicon Valley Bank. https://t.co/Ug3qpot8sJ

— Jeremy Allaire (@jerallaire) March 11, 2023

On Friday, March 10, the California Department of Financial Protection and Innovation shut down Silicon Valley Bank (SVB) and appointed FDIC as the receiver. The regulator cited “insufficient liquidity and insolvency.” The regulator noted that the bank’s depositors will have full access to their insured deposits no later than Monday morning, March 13.

Circle, together with Coinbase, is a member of the Centre consortium, which issues USDC. On March 11, the company announced that it held in SVB a portion of the asset’s reserve ($3.3 billion).

Against this backdrop the stablecoin lost parity with the US dollar. According to CoinGecko, its price touched an all-time low near $0.88. At the time of writing the asset had somewhat recovered its peg and was trading around $0.96.

Later in its blog Circle stated that issuing and redeeming USDC is “limited to the business hours” of US banks.

“USDC liquidity operations will resume in normal mode after US banks open on Monday morning. … As a regulated payment token, USDC will still peg to the US dollar at a 1:1 ratio,” the statement said.

According to the site of FDIC, the standard amount of deposit insurance is $250,000 “per depositor, per insured bank, for each category of account owners.”

The co-emitter of the stablecoin acknowledged that asset returns could take a long time. The company also conceded that the agency’s program might not provide full payouts:

“It is possible that SVB will not return 100% of the funds, and that any transactions may take some time as the FDIC issues debt certificates and advance dividends for depositors. In such a case Circle, as required by law […], will support USDC and cover any shortfall using corporate resources, attracting external capital if necessary.”

According to Circle CEO Jeremy Allaire, 77% of USDC reserves are in Treasury securities, 23% are cash held at various institutions. In addition to SVB, the company uses services from BNY Mellon, BlackRock and Signature Bank.

What is the impact on the USDC reserve?

USDC is 100% collateralized with a combination of cash and US Treasuries.

Specifically, USDC is currently collateralized 77% ($32.4B) with US Treasury Bills (with a three month or less maturation period), and 23% https://t.co/B8QTLHEEVm… https://t.co/IfKygVUaB4

— Jeremy Allaire (@jerallaire) March 11, 2023

Due to the USDC peg, algorithmic stablecoins which used the asset as collateral for issuance also lost their peg. In particular, the peg for lost parity from MakeDAO and FRAX from Frax Finance.

Following Circle’s statement the prices of the latter have also recovered somewhat. According to CoinGecko, at the time of writing both were trading near $0.96.

Earlier, Elon Musk considered the possibility of acquiring Silicon Valley Bank.