Mariano Maisterrena, blockchain expert and CEO of the NFT HeirloomDAO platform, analyzed the causes that led to the recent drop in the stablecoin USDC and to the collapse of banco SVBtwo related facts that caused concern in the world of crypto investments.
The USDC currency, linked to the US dollar and tied to it with a parity of 1 to 1, put the digital finance ecosystem on alert when its price fell below 90 cents this Saturday.
“Circle, the company behind USDC, was found to have dollar deposits that it used as collateral for the cryptocurrency in the Silicon Valley Bank (SVB), the bank that suffered extensive losses last week and is suspected of insolvency. This fact caused fear in the crypto markets, as USDC holders learned that the currency might not be 100% backed by dollar deposits, as is customary. The consequence was that thousands of users sold the coin in exchange for other stablecoins such as USDT or similar,” explained Mariano Maisterrena.
In this context, this weekend it also lost its parity with the dollar and fell below US$0.90, the stable currency. DAI, another of great diffusion among Argentine users. “This is explained by the fact that a significant portion of the DAI collaterals are in USDC, among other currencies. Due to this interrelation, a kind of domino effect occurred,” said Maisterrena.
How bad was the USDC stablecoin crash?
Circle argued that the cash reserves that it had as collateral to support the USDC parity with the dollar were distributed in 6 financial institutionsamong which was Silicon Valley Bank.
“The exact impact SVB has on Circle’s reserves is not yet known, but the company says only $3.3bn, out of a total value base of $40bn, was affected. But other sources say that, in reality, it would be $9 billion committed,” detailed the CEO of HeirloomDAO.
Stablecoins keep their value pegged to the US dollar.
He added: “However, as terrible as this sounds and has generated many fears, the fact that Circle had those deposits in SVB does not mean that they are lost. Now, the bank is intervened by authorities of the United States government, which – seeking to reassure the market – has already communicated that SVB depositors have access to all their funds. Of course, a slow and long audit process will also begin to determine what really happened to the bank’s accounts.”
Mariano Maisterrena underlines that, in addition to Circle, USDC is backed by several important companies in the cryptocurrency industry, including the Coinbase exchange. In addition, users can verify the number of dollars supporting USDC tokens in circulation at any time through the transparency provided by the system. For now, this Monday, after learning that the US guarantees withdrawals from SVB clients, both USDC and DAI recovered value.
SVB collapse: why it is the origin of the crisis
Silicon Valley Bank is recognized for its focus on providing financial services to companies and technology entrepreneurs, among other innovative sectors. In fact, since its founding in 1983 it has supported many startups in Silicon Valley and has expanded globally, with offices in the UK, China, India and Israel, among other countries. “Therefore, it is not uncommon that those responsible for USDC decided to safeguard a part of the stablecoin’s collateral there,” stressed the CEO of HeirloomDAO.
In recent years, SVB’s reserves have been growing, allowing the bank to have a strong financial position. He used a good part of the funds to buy United States Treasury bonds and earn interest returns. However, due to market movements, bank customers needed more cash and began to withdraw money from their accounts.
As a consequence, and in search of liquidity to meet customer demand, SVB decided to sell the bonds it had bought. But because he had to sell them before expiration, he had to accept a lower value and some level of loss.
These losses were compounded as the US Federal Reserve raised interest rates a bit aggressively and left the bonds held by SVB in a bad position., which reduced its value. Seeing that the rate would continue to rise and not being able to compensate for the loss, the bank had no choice but to sell the portfolio and accept a red that is estimated at 1,800 million dollars.
Mariano Maisterrena, CEO of HeirloomDAO.
“The rest of the story unfolded tragically. On March 9, SVB Financial shares plunged more than 62% after the company proposed a share sale to strengthen its balance sheet. The final blow, however, It came when Silicon Valley investors such as Union Square Ventures and Coateu Management warned all companies they had a stake in to withdraw funds from SVB immediately, sparking a bank run that ended up destroying the bank’s balance sheets and generating higher falls in their shares,” said Mariano Maisterrena.
“Finally, and to no one’s surprise, the US government intervened in the bank, froze the action and guaranteed that savers will be able to withdraw all their deposits. Now, there remains the slow task of figuring out how many funds exist in SVB,” he concluded.
