Circle, the operator of one of the world’s largest stablecoins, has said $3.3bn of its reserves are trapped in Silicon Valley Bank, triggering a fall in the value of its token as the crypto market reels from the failure of two US banks this week.
The announcement from Circle overnight on Friday prompted the company’s USDC crypto token to lose its peg to the dollar.
US exchange Coinbase said it was temporarily pausing conversions between USDC and the US dollar. Rival exchange Binance also said it would pause automatic conversions of USDC to BUSD, a stablecoin that carries the Binance branding.
Circle called for an urgent federal rescue plan for SVB.
The collapse of SVB, the second-largest bank failure in US history, is beginning to fan out to customers, in a further blow to the crypto market which is still recovering from a confidence crisis last year that took down many of its biggest names.
Earlier this week Silvergate, a US bank that had courted crypto customers, said it would wind down operations following a run on deposits.
Stablecoins play a key role in connecting traditional and crypto markets, and traders use them like cash or crypto-native dollars to make trades. Most track the value of a major currency such as the dollar one-for-one. Stablecoin operators typically earn interest on the traditional assets that underlie their tokens, with a higher supply in circulation boosting revenue.
Circle’s USD Coin is the second-largest stablecoin on the crypto market with $42bn in circulation, according to company data.
The company said that it holds a quarter of USDC reserves in cash with six banking partners, of which SVB was one. The majority of its $40bn reserves are held in short dated US government bonds and other US banks.
In a blog post on Saturday, Circle said USDC liquidity operations will resume when banks open on Monday. The firm added it would use corporate resources, involving external capital if necessary, if SVB does not return 100 per cent of deposits.
“It’s not just cryptocurrencies themselves that are under pressure: now the banks that support the industry itself are failing. And stablecoins like USDC are the way in and out of crypto for many investors,” said Charley Cooper, a former chief of staff at the Commodity Futures Trading Commission, the US regulator.
“The threat to even the reserve-backed [stablecoin] model has called into question the viability of the intersection between crypto and traditional finance,” he said.
Dante Disparte, Circle’s chief strategy officer, warned on Saturday that the company was protecting its stablecoin from a “black swan failure in the US banking system”.
“SVB is a critical bank in the us economy and its failure — without a Federal rescue plan — will have broader implications for business, banking and entrepreneurs,” he tweeted.
Circle said it would continue to operate normally while it awaited clarity from US regulators on how the failure of SVB will impact its depositors, Circle and USDC. It did not immediately respond to a request for comment.
Since SVB’s collapse the USDC token has traded as low as 88 cents on the dollar, according to industry price tracking website CoinMarketCap.
Circle held cash in several US regulated financial institutions, including Silvergate and SVB, it has disclosed.