Circle Plans to Cover USDC Shortfall After SVB Shutdown

Circle, the issuer of the stablecoin USD Coin (USDC), has been forced to take action to cover a significant shortfall in its reserves after the closure of Silicon Valley Bank (SVB), one of the largest lenders in the United States. Following the announcement that USDC liquidity operations will resume as normal when banks open on Monday, enabling redemption at 1:1 with the US dollar, Circle has stated that it will use corporate resources to cover the reserve shortfall caused by SVB's shutdown.

The stablecoin lost its $1 peg on March 11, trading as low as $0.87 before slowly recovering to $0.98 at the time of publication. The cause of the disruption was the disclosure of $3.3 billion of Circle's reserves held at SVB, which triggered a classic bank run and caused concerns about the bank's future. The Federal Deposit Insurance Corporation was appointed as the receiver to protect insured deposits.

According to Circle, SVB is "a venerable and trusted partner to the US innovation economy," and the bank's failure was due to a classic bank run, much like those seen during the financial crisis in 2008. Circle emphasized that few traditional banks have sufficient liquidity to withstand such a run, and that SVB's situation was caused by significant losses that led to the bank being forced to sell long-duration assets to meet redemption demand. This settlement period on the assets caused a short-term liquidity crunch, leading to the FDIC stepping in to administer the bank on March 10. SVB's fate is being decided this weekend by the FDIC, and Circle hopes that a solution will be found to protect customers' assets.

Relief efforts have already begun in the wake of SVB's closure, with reports that "big banks" are actively working on buying SVB's business. According to Bob Elliot, the Chief Investment Officer of Unlimited Funds, the U.S. Federal Deposit Insurance Corporation will cover 95% of uninsured deposits to the acquirer, with 50% of uninsured deposits paid out next week.

According to Circle's latest audit report from January, USDC is 100% backed by cash and U.S. Treasurys, with nearly $8.6 billion held by U.S. banks as of January 31, representing roughly 20% of its reserves. Another $33 billion of its reserves are held in U.S. Treasurys managed by BlackRock through the Circle Reserve Fund, registered as a government money market fund and held in custody by BNY Mellon. The report was reviewed and certified by the Big Four accounting firm Deloitte.

As Circle works to cover the reserve shortfall caused by SVB's closure, investors and users of USDC will be watching closely to ensure that the stablecoin maintains its peg to the US dollar. While Circle has reassured its users that USDC liquidity operations will resume as normal, the fallout from SVB's shutdown may continue to impact the stablecoin and the wider cryptocurrency market in the coming days and weeks.