Circle Moves USDC Reserves To BNY Mellon As It Crawls Out Of Silicon Valley Debacle
Stablecoin issuer Circle was faced with a torrid week after the collapse of one of its main banking partners, Silicon Valley Bank. Earlier today, after the U.S. government announced plans to bail out the bank, Circle issued a statement saying it will be transferring $3.3 billion deposited in Silicon Valley Bank to an account on BNY Mellon once the funds are available.
Circle To Move $3.3 Billion Deposited In Silicon Valley Bank To BNY Mellon
Silicon Valley Bank (SVB), America’s sixteenth largest bank and one of the favourite financial institutions of venture capital-backed startups, was shut down by regulators on March 10 after suffering a bank run that drained a quarter of its liquidity.
The bank, which had approximately $209 billion in assets under management (AUM) and $175.4 billion in deposits as of December 2022, faced a liquidity crisis after failing to raise capital from investors and was forced to sell off its investments at a $1.8 billion loss.
The bank was declared insolvent by the California Department of Financial Protection and Innovation (DFPI) and placed under the receivership of the Federal Deposit Insurance Corporation (FDIC). The insolvency came as a surprise to the bank’s shareholders and customers as it was considered to be in “sound financial condition” only a day prior.
Panicked depositors, including Circle, rushed to remove their funds, initiating a withdrawal of $42 billion that led to the bank being drained of a quarter of its capital within hours. SVB did not have enough liquidity to support the withdrawals and shut down operations with a negative cash balance of $958 million.
On March 11, Circle said SVB was one of the six banks it uses to hold $9.7 billion in cash backing the $40 billion reserve of its USDC stablecoin. The crypto firm confirmed it has approximately $3.3 billion worth of USD reserves deposited in the troubled bank.
This resulted in USDC holders cashing out $2.7 billion worth of the stablecoin in under 24 hours, causing the token to lose its parity with the dollar and trade as low as $0.87 on Saturday. Popular crypto brokers Coinbase and Robinhood halted all exchanges in USDC, causing the second-largest stablecoin to crumble.
Relief came in the form of the U.S. government after the Federal Reserve, FDIC, and the Treasury Department released a joint statement on March 12 saying they will be bailing out Silicon Valley Bank and its counterpart Signature Bank. Regulators assured the banks’ depositors would have complete access to their funds from Monday onwards. The Silicon Valley Bank collapse is the second largest bank failure in the United States after Washington Mutual shut down during the height of the 2008 financial crisis.
Jeremy Allaire, CEO of Circle, said on Twitter that all banking operations for USDC will resume on March 13. The Fed’s announcement was a beacon of hope for the company as USDC rebounded to $0.99, where it remains at the time of writing.
The co-founder also clarified the reserve status of USDC, which is “100%” collateralized by U.S. dollars and treasury bonds. Currently, 77% or $32.4 billion worth of the stablecoin’s reserves is collateralized by U.S. Treasury Bills with a maturity period of three months or less.
These assets are managed by BlackRock and held in the custody of BNY Mellon. Meanwhile, 23% or $9.7 billion is held in cash at various banks, including SVB. Silicon Valley Bank has 8% of the USDC reserves, which is safe and redeemable 1:1 with the dollar.
Circle Expands Banking Partnership To Include More Trusted Institutions
In light of the incident, Circle is expanding its banking partnerships to include more trusted financial institutions. The company has added Cross River Bank as a new commercial partner for minting and redeeming USDC.
Cross River Bank is the banking service provider for payments giant Visa and cryptocurrency firm Coinbase. Additionally, Circle will move all its $9.7 billion USDC cash reserves to BNY Mellon and use the bank’s payments settlements network to process USDC mints and redeems.
The company confirmed that it had no exposure to Signature Bank, another financial institution used by crypto firms that declared insolvency last week. Circle also terminated its partnership with Silvergate Bank, which facilitated direct USD to USDC exchanges for investors via the Silvergate Exchange Network (SEN).
On March 8, the crypto-focused banking giant announced it was preparing for liquidation after suffering heavy losses from an $8 billion bank run caused by its exposure to bankrupt crypto exchange FTX in November.
Jeremy Allaire thanked the U.S. government and financial regulators for taking necessary steps to mitigate the risks of the banking system. The CEO has long been advocating for moving the banking industry from fractional reserve banking, which possesses a high amount of risk to institutions and depositors, to the much safer fully-reserved digital currency banking system.