Stablecoin USDC breaks dollar peg after revealing $3.3 billion Silicon Valley Bank exposure

Stablecoin USD Coin (USDC) lost its dollar peg and slumped to an all-time low on Saturday after Circle, the U.S. firm behind the coin, revealed that some of the reserves backing it were held at Silicon Valley Bank.

Circle has $3.3 billion of its $40 billion of USDC reserves at collapsed lender Silicon Valley Bank, the company said in a tweet on Friday.

The coin broke its 1:1 dollar peg and fell as low as $0.88 shortly after 0800 GMT on Saturday according to market tracker CoinGecko. It recovered slightly to trade around $0.90 by 1120 GMT.

Silicon Valley Bank collapsed on Friday in the largest U.S. bank failure since the 2008 financial crisis, roiling global markets and stranding billions of dollars belonging to companies and investors.

Circle said in a tweet on Friday that the company and USDC "continue to operate normally" while the firm waits for clarity on what will happen to Silicon Valley Bank depositors.

Meanwhile, U.S. crypto exchange Coinbase said in a tweet it was not allowing USDC to be exchanged for U.S. dollars over the weekend while banks are closed, citing "heightened activity", while it plans to resume swaps on Monday.

Circle did not immediately respond to a request for comment about the dollar peg, sent outside of U.S. working hours.Joseph Edwards, investment advisor at Enigma Securities, said the situation was "extremely serious" for USDC.

"No matter how sound Circle's operations are, this sort of depeg on a stablecoin tends to fundamentally undermine confidence in it," Edwards said.

"The short-term implications here are dramatic and unknowable, especially once systems start to have to be adjusted to the reality that 1 USDC isn't trading at 1 USD for the time being."

Stablecoins are cryptocurrencies designed to maintain a constant exchange rate with "fiat" currencies - those backed by a central government rather than a physical commodity such as gold - for example through a 1:1 U.S. dollar peg.

Used in cryptocurrency trading, they have surged in value in recent years. USDC is the second-biggest stablecoin with a market cap of $37 billion. The largest, Tether, has a market cap of $72 billion, according to CoinGecko.

USDC's price usually holds close to $1, making Saturday's drop unprecedented. According to CoinGecko data, its previous all-time low was around $0.97 in 2018, though in 2022 it fell just below $0.99 when cryptocurrency markets were roiled by the collapse of crypto hedge fund Three Arrows Capital.

Traders have been on guard this week for signs of contagion in the financial sector and beyond from troubles for Silicon Valley Bank and crypto-focused Silvergate (SI.N), which this week disclosed plans to wind down operations and voluntarily liquidate.

Boston-based Circle said last week it had moved a "small percentage" of USDC reserve deposits held at Silvergate to its other banking partners.

The chief executive of cryptocurrency exchange Binance said in a tweet on Friday it had no exposure to Silicon Valley Bank, as did Tether Chief Executive Paolo Ardoino.

Stablecoin issuer Paxos and crypto exchange Gemini also tweeted that they do not have relationships with the bank.

Reporting by Elizabeth Howcroft in London and Rishabh Jaiswal in Bengaluru; Editing by William Mallard and David Holmes