Editor’s Note: This article will be updated as the situation develops. Nothing in this article should be taken as financial advice.
The crypto world is buzzing with the news of “USDC de-pegging” but what does this mean? It means that the price of USDC, which is supposed to be the same value as 1 US dollar, has dropped.
A cryptocurrency loses value when people sell it off quickly, at the same time. Usually, this comes after they hear some news about it. In this case, the news involved a bank known as Silicon Valley Bank. Let’s talk about it.
What is Silicon Valley Bank (SVB)?
Silicon Valley Bank used to be one of the biggest startup lenders until it shut down and was seized by the US Federal Deposit Insurance Commission (FDIC). Several startups held their money with SVB including Circle, the company behind USDC. To fully understand how this affects USDC, let’s talk about stablecoin reserves briefly.
How Stablecoin Reserves Work
Stablecoins like USDC are not just tied to the digital price of the US dollar. For each unit of USDC, there should be 1 dollar held in reserve somewhere. In a recent announcement on Twitter, Circle claimed that it $3.3 billion out of its $40 billion USDC reserve was held on Silicon Valley Bank. After the bank shut down, Circle tried to withdraw the $3.3 Billion but was unsuccessful. After the announcement, people started selling their USDC quickly and this caused its price to drop from $1 to $0.87.
What Next?
This situation mainly affects people holding USDC. Until Circle can get money out of Silicon Valley Bank, they may look for other ways to restore the value of USDC. In the meantime, the FDIC has stated that they may pay some of the money to companies with deposits in Silicon Valley Bank.
This issue does not directly affect people who hold other cryptocurrencies like USDT or BUSD at the time of writing this post.
