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As the Fed bails out banks, cryptos rally and USDCs peg is restored
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(Kitco News) - A crisis with one of the largest players in the cryptocurrency ecosystem seems to have been averted as Circle, the company responsible for issuing USD Coin (USDC), the second-ranked stablecoin in the market, has announced that all their funds held at Silicon Valley Bank (SVB) would be available beginning Monday morning.
“The $3.3B USDC reserve deposit held at Silicon Valley Bank, about 8% of the USDC total reserve, will be fully available when U.S. banks open tomorrow morning,” Coinbase wrote. “No USDC cash reserves were held at Signature Bank. As a regulated payment token, USDC remains redeemable 1:1 with the U.S. Dollar.”
On Friday, as regulators in the U.S. were announcing the seizure of SVB, Circle revealed that it had a portion of its USDC cash reserves held at the bank. This led many USDC holders to dump the token out of fears that it could collapse the way TerraUSD (UST) did in May of last year, an event that sent a contagion shockwave across the crypto ecosystem.
As a result of the rush to exit USDC, the stablecoin lost its peg and briefly fell to a low of $0.82 on some exchanges as traders opted to hold U.S. dollars or Tether (USDT), the top-ranked stablecoin.
USDC/USD 4-hour chart. Source: TradingView
Matters began to improve for Circle, USDC, and the wider crypto market beginning on Sunday when U.S. Treasury Secretary Janet Yellen and U.S. prudential regulators released a joint statement saying that all depositors with SVB and Signature Bank would be made whole.
Circle also provided additional details about the reserves backing USDC, indicating that 77% ($32.4B) is currently collateralized with short-dated U.S. Treasury Bills, “the most liquid assets in the world and direct obligations of the U.S. government.”
BNY Mellon is the current custodian of those funds and is now also the primary holder of the 23% (9.7B) worth of reserves held in cash, while BlackRock provides active liquidity and asset management.
“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,” said Jeremy Allaire, Co-founder and CEO of Circle. “We are heartened to see the U.S. 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.”
At the time of writing, USDC is trading at an average price of $0.9994 across all exchanges.
To help put a halt to the growing banking contagion, the Federal Reserve announced the creation of a new Bank Term Funding Program (BTFP) that will offer loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral.
“These assets will be valued at par,” the Fed wrote. “The BTFP will be an additional source of liquidity against high-quality securities, eliminating an institution's need to quickly sell those securities in times of stress.”
While the move helped to reassure markets and led to a rally across crypto prices, many in the crypto ecosystem said the decision amounts to another bailout where taxpayers will be on the hook for poor risk management by banking institutions.
??QE IS BACK??--FED JUST BAILED OUT BANKS, INFLATION TO KEEP RUNING HOT:
— Caitlin Long ?????? (@CaitlinLong_) March 12, 2023
* loans of up to 1yr to banks vs US Treasuries, agency debt & mortgage-backed securities + other assets as collateral
* Fed valuing these assets at *par*??(??THERE'S THE BAILOUT??)https://t.co/LvMA8N98Ei
In a follow-up tweet from Caitlin Long, CEO of Custodia Bank, the staunch cryptocurrency proponent said that the “Federal reserve just became a leveraged lender, lending against collateral it values at par when that collateral may be trading at $0.60 on the dollar. So much for Bagehot's rule of central banking, lend freely against *good collateral* at penalty rate. Fed just broke w/ that.”
A survey of the crypto market would suggest that investors agree with Long that the government is bailing out banks, as crypto prices are up across the board amid a resurgence of bullish energy that is reminiscent of past rallies that resulted after the Fed announced various rounds of quantitative easing.
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