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In the Wake of Bank Collapses, Are Stablecoins Really That Stable?

Press Releases Crypto News BeInCrypto In the Wake of Bank Collapses, Are Stablecoins Really That Stable?

Banks are collapsing at an alarming rate, leaving investors and stakeholders questioning the stability of stablecoins. First, Silvergate failed, and now, SVB, which held $3.3B of Circle’s funds (the issuer of USDC), has been shut down and taken over by the FDIC.

This news caused the USDC peg to recently fall to a low of $0.869 on the Kraken exchange. A contagion soon followed, resulting in depegging across Dai (DAI), TrueUSD (TUSD), Frax (FRAX), and Pax Dollar (USDP). Consequently, USDT surged in price to a high of $1.06, suggesting a movement of money to the stronger stablecoin.

The Collapse of SVB: A Wake-Up Call for Stablecoins

The collapse of SVB followed by the depegging of these coins has raised questions about the stability of stablecoins and their dependence on the banking system. While banks failing is not a new phenomenon, it has happened before, and in recent years, many banks have defaulted, including Silvergate and now SVB.

These failures have caused widespread panic and confusion among investors, regulators, and the wider market. The collapse of SVB was particularly concerning as it held a significant amount of Circle’s funds, which made up a large portion of the USDC supply.

The impact of SVB’s drag on the stability of USDC was significant. USDC is designed to maintain a 1:1 peg with the US dollar, which means that for every USDC token issued, there should be an equivalent amount of US dollars held in reserve. But the collapse of SVB meant that $3.3B of Circle’s funds, which were held by SVB, were made inaccessible, putting the USDC peg at risk.

My lead investor just texted me this about SVB. pic.twitter.com/hNVha385gj

— Roshan Patel (@roshanpateI) March 10, 2023

Roshan Patel: Twitter

Stablecoins in Crisis: The Need for Transparency and Regulation

The de-pegging of USDC and other coins that followed the collapse of SVB highlighted both their fragility and their dependence on the stability of the banking system.

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Author: Jay Speakman

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