Circle wants to fill missing liquidity with corporate funds

On March 11, Circle announced that it intends to use company resources to cover the reserve shortfall created after the closure of Silicon Valley Bank (SVB). Circle is an issuer of USD-pegged stablecoins such as the USD Coin (USDC).

Loss of $1 link

Circle has announced that USDC liquidity operations will resume “normally when banks open in the United States on Monday morning.” This will allow USDC redemption 1:1 with the US dollar ($).

The announcement followed the loss of the $1 peg by the stablecoin on March 11. The USDC fell as low as USD 0.87 before slowly returning to USD 0.96 right now. The loss of the peg was triggered by the disclosure of Circle’s $3.3 billion in reserves at Silicon Valley Bank.

Classic bank run is the culprit

As one of the largest lenders in the United States (US) and a major player in venture capital backed companies, Silicon Valley Bank was shut down by the California Department of Financial Protection and Innovation on March 10 of this year. This caused concern about the future. To protect the insured deposits, the Federal Deposit Insurance Corporation was appointed as trustee.

In the statement, Circle asserted that SVB is “a venerable and trusted partner of the US innovation economy,” which suffered a “classic bank run, much like the one we saw during the 2008 financial crisis. Few traditional banks have enough liquidity to cope to offer such a flight.” Via a Twitter message Jeremy Allaire shared an update on USDC and the Silicon Valley Bank.

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The classic bank run was caused, at least in part, by the significant losses the bank suffered. This forced the bank to sell long-term assets in order to meet the redemption demand. However, this in turn has led to a liquidity crisis in the short term. However, they never got over this.

Second largest stablecoin

With a market cap of over $42 billion as of January 31, USDC is the second largest stablecoin and acts as collateral for many stablecoin ecosystems. The stablecoin’s depeg therefore had an almost immediate impact on other stablecoin ecosystems.

Relief efforts were already underway less than 72 hours after the collapse of the US tech bank. Bob Elliot, Unlimited Funds’ chief investment officer, reported that “major banks are actively working to buy SVB assets.” This attempts to get and give back all funds from the users. It is not yet known how long this process will take.

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