On March 29th, 2023, Silicon Valley Bank (SVB) suffered a bank run after revealing a hole in its finances due to the sale of part of its inflation-hit bond portfolio. The bank run led to a depegging event for major stablecoins in the crypto sector, leaving many to wonder whether it was a simple stress test or a sign of weakness in the system.
The second-largest stablecoin by market capitalization, the Centre Consortium’s USD Coin (USDC), saw its value plunge to $0.87 after it was revealed that $3.3 billion of its over $40 billion in reserves was held at SVB and was, as a result, possibly lost. Coinbase (NASDAQ:COIN), a member of the Consortium, seemingly exacerbated the crisis when it announced it was halting USDC-to-dollar conversions over the weekend.
The SVB Collapse
Silicon Valley Bank, one of the largest banks in the United States and a major player in the technology and venture capital industries, has long been considered a stable and reliable institution. However, the bank’s decision to sell part of its inflation-hit bond portfolio proved disastrous when the market turned against it. This led to a hole in the bank’s finances and triggered a bank run as customers rushed to withdraw their funds.
The bank’s collapse had a ripple effect on the crypto sector, particularly on stablecoins, which are digital currencies pegged to a stable asset, such as the US dollar. Stablecoins are designed to provide stability in a volatile market, and they have become increasingly popular among investors and traders in recent years.
The depegging of stablecoins refers to the loss of the coins’ peg to the stable asset they are supposed to be tied to, in this case, the US dollar. When SVB collapsed, it was revealed that a significant portion of the reserves backing the USD Coin stablecoin was held at the bank. As a result, the value of USDC plummeted, falling as low as $0.87.
Coinbase’s decision to halt USDC-to-dollar conversions over the weekend only added to the chaos, as investors were unable to liquidate their holdings. The depegging event sparked concerns among investors and regulators, who wondered whether stablecoins were as stable as they claimed to be.
Stress Test or System Weakness?
The depegging of stablecoins caused by the SVB collapse has raised questions about the resilience of the crypto sector. While some experts argue that the depegging was a simple stress test of the system, others see it as a sign of weakness.
On the one hand, stablecoins are designed to withstand market volatility, and the fact that they depegged in response to the SVB collapse could be seen as a stress test of the system. However, others argue that the depegging event reveals underlying weaknesses in the stablecoin ecosystem, particularly in terms of the lack of transparency and accountability in the sector.
The collapse of Silicon Valley Bank and the subsequent depegging of stablecoins has raised concerns about the stability and resilience of the crypto sector.