Stablecoin USDC lost its peg of 1 dollar. In the early hours of past Saturday, it even temporarily fell as low as $0.89. The reason is that Silicon Valley Bank (SVB), which held dollars that backed USDC, went under. Only after the American Government made the assurance that SVB depositors will be made whole, USDC recovered to $0.99.  

The fact that the stablecoin which is considered most trustworthy, lost its 1 dollar pairing, rattled crypto markets over the weekend. It was little consolation that in this case, the problems stemmed not from bad actors in the crypto industry but from the traditional financial system.   

As we discussed earlier in the bearish news article, Silicon Valley Bank (SVB) is in trouble. Only hours later, it was taken over by the FDIC, the US 'insurance fund' that protects depositors.  

As the FDIC only insures deposits up to 250 thousand dollars, this caused panic among companies that had larger outstanding deposits with Silicon Valley Bank. Early Monday morning European time, the American government chose to step in and cover all deposits. It had become clear that not doing so might cause a bank run on many smaller American banks, spreading the problem across the wider banking system.   

Why SVB's fall hurts stablecoin USDC 

Why does this matter to crypto? One of SVB’s clients is Circle: the company that issues the second largest stablecoin USDC. Circle had deposited 3 billion dollars or 8% of their reserves at SVB, which might have been (partially) lost without the guarantee of the American government that came later. Losing this collateral would mean that if every holder of USDC stablecoin exchanged them for real dollars, Circle couldn't have met these withdrawals. This realization made people want to sell their USDC and hence the price drop. 

The ripple effect spread through competing stablecoin USDT, which rose in price to roughly $1.05. Also, some other stablecoins lost their peg, as they partly use USDC as collateral. An example is MakerDAO’s DAI. 

It is quite possible that USDC will fully climb back to 1 dollar, and it is already nearly there, especially after the American government stepped in to secure SVB depositors.   

Conclusion 

The events have shown that not just algorithmic stablecoins like UST are vulnerable. Also, dollar-backed stablecoins have an Achilles heel: the bank where these dollars are parked. More broadly speaking, the entire American public has been made aware, for the first time since 2008, that they don't really own their money at a bank. Bitcoin fixes this. 

Let's see what the reaction of American policy makers to this wave of bank failures will be. There will be a behind-doors emergency FED meeting later this week.