The Federal Deposit Insurance Corporation (FDIC) has taken over two banks at which Circle held billions of dollars worth of backing for its stablecoin, USDC. By making depositors whole at these insolvent banks, the US government has essentially bailed out USDC’s $1 peg.
Early last week, Circle held over $10 billion worth of assets at Signature and Silicon Valley (SVB) banks. Although Circle was able to withdraw the majority of its funds prior to the weekend when both banks went under, it still exceeded $3.3 billion on deposit as they failed.
In other words, on Saturday, at least 8% of the value of USDC’s $39 billion market capitalization was locked within two insolvent banks. By Sunday, the US government had restored that loss.
The price of the so-called stablecoin had slipped into the $0.80s. After a joint statement from the US Treasury, Federal Reserve, and FDIC, traders regained confidence and bid the token’s price back up to $1.
A bailout for DeFi’s most popular denominator
During the crisis, Circle CEO Jeremy Allaire disabled the minting and redemption of USDC through Signature Bank’s SigNet.
Circle controls the administrative keys needed to blacklist particular USDC tokens. The company also controls the issuance and redemption of USDC for USD, which is further constrained by the US banking system.
Allaire initially expressed confidence that Circle would enable USDC redemption and minting with a new bank as soon as possible. In a later tweet, he said Circle selected Cross River Bank for automated, USDC-related settlements.
Thanks to the government’s bailout on Sunday, Allaire was able to subsequently affirm that USDC reserves were 100% collateralized.
Circle is moving most of its Signature Bank cash to BNY Mellon.
Criticisms of management and fractional reserves
Data Finnovation criticized Circle’s selection of Cross River Bank, saying its managers have a poor track record of treasury management. It posted a series of regulatory filings showing a mix of mortgages, commercial loans, and consumer finance on Cross River Bank’s balance sheet.
In his tweet thread, Allaire briefly acknowledged the risks of keeping money in a fractional reserve bank. He said he supports the Payment Stablecoin Act, which would require stablecoin issuers to keep cash and short-term treasury bills in a Federal Reserve-chartered bank account. Circle said it keeps 77% of its USDC reserves in treasury bills.
A co-host for the YouTube channel Paul Barron Network said Circle sent a notice that it was suspending USDC redemptions in Brazil, India, Indonesia, Latvia, Mexico, and the Philippines. Circle has not officially announced an end to USDC redemptions in these countries.
On Thursday, SVB customers tried to withdraw $42 billion in deposits while, at the smaller Signature Bank, depositors attempted to withdraw 20% of the entire bank’s assets a day later.
In 2018, Signature attracted attention from regulators when it became one of the few banks willing to do business with crypto companies. By early 2022, digital asset companies accounted for 27% of the bank’s deposits and it served customers including Binance, Coinbase, and Circle.
Feds backstop the $1 peg of USDC
Fortunately for proponents of the USDC, the US Treasury, Federal Reserve, and FDIC bailed out deposits at two banks holding at least 8% of the backing of USDC.
The government declared SVB and Signature as systemically important. To alleviate contagion to the US financial system, the FDIC guaranteed all deposits at both banks — including deposits above the FDIC’s standard, $250,000 per customer limit for federal deposit insurance.
USDC issuer Circle has subsequently switched its primary bank to BNY Mellon and is moving its automated settlements to Cross River Bank. It temporarily disabled USDC redemptions and minting amid the transition.