Despite $3.3bn Deposit, Circle Emerges From SVB Collapse Unscathed

March 14, 2023
Following a turbulent weekend, the issuer of the world’s second-largest stablecoin has recovered its $3.3bn deposit from Silicon Valley Bank (SVB), which collapsed on Friday.

Following a turbulent weekend, the issuer of the world’s second-largest stablecoin has recovered its $3.3bn deposit from Silicon Valley Bank (SVB), which collapsed on Friday (March 10).

US stablecoin issuer Circle has announced that it has regained access to a $3.3bn deposit held at SVB, after being unable to withdraw the deposit going into the weekend.

In a statement, Circle said the deposit is now secured following the announcement of a joint rescue plan by the US Treasury, Federal Reserve Board (FRB) and Federal Deposit Insurance Corporation (FDIC).

As part of the agreement, the FRB confirmed that it will provide additional funding to depository institutions, including SVB, to help ensure that banks can meet the needs of their depositors.

“The Federal Reserve is prepared to address any liquidity pressures that may arise,” said the FRB, announcing the action.

“These actions will reduce stress across the financial system, support financial stability and minimise any impact on businesses, households, taxpayers, and the broader economy.”

The additional funding will be made available through the creation of a new Bank Term Funding Program (BTFP).

This will offer loans of up to one year to banks, savings associations, credit unions and other depository institutions pledging US Treasuries, agency debt and mortgage-backed securities as collateral.

Valuing these assets at par, the BTFP will offer an additional source of liquidity against them, eliminating an institution's need to quickly sell those securities in times of stress.

Following the FRB announcement, Circle CEO Jeremy Allaire thanked the federal regulators for their swift action.

“Trust, safety and 1:1 redeemability of all USDC in circulation is of paramount importance to Circle, even in the face of bank contagion affecting crypto markets,” he said.

“We are heartened to see the US government and financial regulators take crucial steps to mitigate risks extending from the banking system.

“We’ve long advocated for full-reserve digital currency banking that insulates our base layer of internet money and payment systems from fractional reserve banking risk.”

A wobbly weekend at Circle

Last Friday, as a run on SVB was developing, Circle announced that it holds $3.3bn in cash at SVB, or about 8 percent of its total stablecoin reserves.

One day later, Circle announced that it had attempted to withdraw the $3.3bn by wire transfer on Thursday, but the withdrawal had not yet been processed.

This prompted Circle to call for federal regulators to intervene and promoted a run on the USDC stablecoin, whose price dropped from $1 to below $0.90 as holders rushed to sell USDC for other assets.

In turn, this led major US exchange Coinbase to pause conversions of USDC to USD while the $1 peg was restored.

“During periods of heightened activity, conversions rely on USD transfers from the banks that clear during normal banking hours,” Coinbase said in a statement.

“When banks open on Monday, we plan to re-commence conversions.”

Circle faces loss of confidence

The run on SVB has offered a stress test for Circle, challenging both its claim to 24/7 redeemability of funds for USDC holders and minimal counterparty risk.

Although Circle has long said that its ultimate goal is to hold cash reserves directly with the Federal Reserve, users may be less inclined to wait for that day in light of the impact of the SVB collapse.

In Circle’s latest independent attestation, published by Deloitte in January, Circle disclosed that it holds cash deposits at numerous fractional reserve lending institutions.

These included: SVB; Bank of New York Mellon (BNY); Citizens Trust Bank; Customers Bank; New York Community Bank, a division of Flagstar Bank, N.A.; Signature Bank; and Silvergate Bank.

As of last week, Circle held $9.7bn in cash spread across all of these institutions, with the exception of Silvergate, from which Circle had already divested.

That $9.7bn made up about 23 percent of Circle’s reserves, while the remaining 77 percent was in short-term US Treasury Bills.

In early March, to “reduce bank risk”, Circle said it deposited $5.4bn in cash at BNY, which it described as “one of the largest and most stable financial institutions in the world, known for the strength of their balance sheet and as a custodian”.

Last week, Circle also said it holds $1bn in cash at Customers Bank, but it remains unclear how much of Circle’s cash was split between the rest of its banking partners outside SBV, BNY and Customers Bank.

Another of Circle’s banking partners, Signature Bank, collapsed at the same time as SVB, but Circle has yet to comment on its full exposure to Signature Bank.

John Reed Stark, former head of internet enforcement at the Securities and Exchange Commission (SEC), said the collapse of both Signature Bank and Silvergate Bank underscores the contagion risk presented by crypto banking partners.

“Any bank doing any crypto-related work poses a systemic threat and faces a 24-7 US regulatory colonoscopy,” he said.

“If there is no way to cash-in casino chips after gambling, people will stop going to casinos, and goodbye crypto.”

Hilary Allen, professor of financial regulation at American University in Washington, DC, added that Circle’s weekend tremors highlight the difficulty of making stablecoins stable without incentivising risk.

"The only truly effective way to prevent runs and make stablecoins stable is to put a government guarantee behind them,” she said.

“But it seems like a truly terrible idea to guarantee something that has no real use case other than facilitating crypto speculation."

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