Circle Plans to Use Corporate Resources to Cover Shortfall in USDC Reserves
After the Silicon Valley Bank (SVB) issued a shutdown last Friday, USDC stablecoin issuer Circle came under huge pressure. In its disclosure, Circle said that it has 8% of its total $40 billion reserves i.e. $3.3 billion stuck with Silicon Valley Bank.
This news was enough to create mass panic among crypto investors followed with heavy withdrawals and volatility in the USDC stablecoin. Soon after, the USDC stablecoin lost its Dollar peg dropping under 90 cents at one point of time.
On Saturday, some major crypto exchange like Coinbase and Binance announced pausing the USDC: USD transactions. As we know, USDC is a USD-pegged stablecoin and thus technically designed to keep a constant price of $1.
However, USDC’s ability to stay at $1 depends on the ability to redeem from the issuer directly at 1:1. But USDC-issuer Circle has quickly swept into the damage control mode and said that they would cover “any shortfall” from the $3.3 billion worth of funds held by the collapsed Silicon Valley Bank.
In its blog post, Circle has stated that they are legally obliged “stand behind” USDC and thus plans to use corporate resources—and "external capital if necessary” in order to ensure that stablecoins can be redeemed in a 1:1 ratio.
Circle CEO Jeremy Allaire gave some confidence to USDC holders stating: “While USDC can be used 24/7/365 on chain, issuance and redemption is constrained by the working hours of the U.S. banking system. USDC liquidity operations will resume as normal when banks open on Monday morning in the United States. As a practical matter, our teams are well prepared to handle significant volume, built on the strong liquidity and reserve assets discussed below. As a regulated payment token, USDC will remain redeemable 1 for 1 with the U.S. Dollar”.
Furthermore, Circle has said that their USDC coins are 100% collateralized with cash and US Treasuries. “USDC is currently collateralized 77% ($32.4B) with U.S. Treasury Bills (with a three month or less maturation period), and 23% ($9.7B) with cash held at a variety of institutions, of which SVB is only one,” Circle wrote.
The stablecoin issuer has also clarified that they have the remaining 23%, around $9.7 billion, is in cash while the company has deposited $5.4 billion with BNY Mellon to “reduce bank risk”.
Circle also said that they have initiated the transfer of its $3.3 billion cash reserves with SVB to other banking partners. “Though these transfers had not yet been settled as of close of business Friday, we remain confident in the FDIC’s management of the SVB situation and stand ready to receive these funds,” it said.
The Federal Reserve and FDIC initiated a move to shutdown Signature Bank on Sunday, in order to stop the SVB contagion from spreading further. This has instilled some confidence among investors and crypto markets soared past $1 trillion earlier today.