SVB Fallout: Circle’s USDC Stablecoin Depegs on $3 3 Billion SVB Exposure

On the other end of the spectrum, giving individuals more control over their money is a stated goal of cryptocurrencies in general and Diem specifically. Cryptocurrencies, including stablecoins, reduce a lot of barriers to entry for conventional banking. Two of the most popular stablecoins are USD Coin and Tether , which are pegged to the U.S. dollar.

Tech companies went on hiring sprees and a slew of startups received funding. Silicon Valley Bank ended the first quarter of that year with $60 billion in customers’ total deposits. By the end of the first quarter in 2022, Silicon Valley bank had a total of around $200 billion in customer deposits.

Then, in an effort to tackle rising inflation in the U.S., the Federal Reserve raised interest rates. The cost of borrowing money due to higher interest rates caused the tech industry to recalibrate. And adding further to the problem, venture capital money started to dwindle as VCs pulled back from tech investments.

Why Are Stablecoins So Important?

To be super specific, USDC is also an ERC-20 utility token, which is standard for creating smart contracts on the Ethereum network. A Stablecoin is a type of cryptocurrency where the value of the digital asset is supposed to be pegged to a reference asset, which is either fiat money, exchange-traded commodities , or another cryptocurrency. Stablecoins such as USDC, the second-largest by market size, are a crucial cog in the world of crypto trading. They are designed to keep a steady value, and are typically backed by reserves of traditional assets such as dollars, bonds or gold.

• While KYC has become, for most of us, a normal part of dealing with money, crypto proponents argue KYC is prohibitive when applied to central banking institutions in other countries.
• They also maintain reserve assets as collateral or through algorithmic formulas that are supposed to control supply.
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• Roku noted that it believed its remaining cash and its cash flow from operations would be enough to fund its capital expenditures and working capital needs for the next 12 months and beyond.
• As a stablecoin is a type of cryptocurrency, it will likely fall under the same regulations as crypto in your local jurisdiction.
• These include greater transaction transparency, security, and the potential privacy of users.
• Federal Reserve sets monetary policy publicly based on well-understood parameters, and its status as the issuer of legal tender does wonders for the credibility of that policy.

Stablecoins are cryptocurrencies whose value is pegged, or tied, to that of another currency, commodity, or financial instrument. Stablecoins aim to provide an alternative to the high volatility of the most popular cryptocurrencies, including Bitcoin , which has made crypto investments less suitable for common transactions. But this is now changing thanks to the increasing prominence of stablecoins, which are helping to alleviate concerns around volatility. In this setting, a central issuer or bank holds a certain amount of fiat currency in reserve and issues a proportionate number of tokens.

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As the name suggests, crypto-collateralized stablecoins are backed by cryptocurrencies , rather than fiat currencies. Instead of relying on a central issuer to store the reserve, crypto-backed stables use smart contracts to secure assets as collateral. To account for the unpredictable volatility of the cryptocurrency market, many decentralized crypto-backed stablecoins like MakerDAO’s DAI token are over-collateralized, with most requiring a 200% collateralized ratio. This means that for every $100 of DAI you wish to borrow, you must back it with $200 worth of ETH. This allows ETH to maintain its peg even during times of intense market volatility. Rather than being backed by cryptocurrency, algorithmic stablecoins use specialized algorithms and smart contracts to control token supply.

The most common use case is to purchase USDC, store it on an exchange or in a crypto wallet, and then use it to fund purchases of other cryptocurrencies. USD Coin is the currently the second-largest stablecoin, with a current market capitalization of $73 billion. USD Coin and Tether together account for 80% of the capitalization of the global stablecoin market. As its name suggests, USD Coin is a cryptocurrency whose value is tied to the U.S. dollar. USD Coin is a stablecoin, and as such one USDC should always be equal in value to one dollar. Reuters, the news and media division of Thomson Reuters, is the world’s largest multimedia news provider, reaching billions of people worldwide every day.

While USDC’s value is based on the value of the U.S. dollar, Bitcoin’s value is derived from its limited supply. If you’re keeping score, currently, there are roughly 19 million Bitcoins in the marketplace. Crypto believers say this scarcity will enable the coin’s value to continue rising over time. Stablecoins like USDC are used differently than cryptos like Bitcoin or Ethereum , which fluctuate in price. The sole purpose of this crypto is to provide a stable store of value, rather than provide an asset that, theoretically, appreciates in value over time.

CBDCs Are a Subset of Stablecoins

The incident highlights how risks in the traditional banking sector can bleed over into the newfangled crypto market. By then, the company was already dealing with critics questioning the adequacy of its reserves and, as subsequent investigations would what is a stablecoin and how it works show, having trouble accessing banking services. Tether also issues tokens pegged to the euro, the offshore Chinese yuan, the Mexican peso, and gold, none with more than a small fraction of the market cap of its U.S. dollar-pegged USDT tokens.

The most famous cryptocurrency, Bitcoin, has lost two-thirds of its value since hitting a record high last November, and Ethereum is shedding its worth nearly as fast. The statements made in this article are for educational purposes only and should not be considered financial advice or an investment recommendation. Fiat-collateralized stablecoins are usually more centralized than other cryptocurrencies. Tether is currently the world’s largest market capitalization stablecoin.

What are some of the most popular stablecoins?

Many financial institutions looking to enter the crypto space, including JP Morgan, are interested in stablecoins. There is often little scope for changing the total coin supply since it is predetermined or already mined. Cryptocurrencies are unable to adhere to an adequate monetary policy, as is evident from their very nature. The crypto community is in need of a list of stablecoins to address the need for stability in the value of transfers. The largest stablecoin, under the management of the iFinex group that also runs the popular Bitfinex crypto exchange, posted unusual gains in this banking crisis. Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs.

Ironically, it appears the dollar-pegged stablecoin is as reliant on banks and government action as fiat predecessors. These stablecoins are centralized, which parts of the crypto community may see as a drawback, but it also protects them from crypto volatility. Gold has long been seen as a hedge against stock market volatility and inflation, making it an attractive addition to portfolios in fluctuating markets. Digix is a stablecoin backed by gold that gives investors the ability to invest in the precious metal without the difficulties of transporting and storing it.

What is a stablecoin? Everything you need to know

However, in practice, few if any stablecoins actually meet these assumptions. Lastly, it’s quite obvious that it would be very difficult to include the entire list of stablecoins here. Readers can access a detailed analysis of the fundamentals of stablecoin and the reasons behind its popularity. Currently, the stablecoin ecosystem contains almost 200 stablecoins, making it difficult to compile a comprehensive list. On the other hand, the notable stablecoins listed here can provide valuable insights into the characteristics found in the majority of stablecoins. Paxos Standard’s reputation as a reliable stablecoin has also made PayPal’s partnership with them possible.

A third variety of stablecoin, known as an algorithmic stablecoin, isn’t collateralized at all; instead, coins are either burned or created to keep the coin’s value in line with the target price. Let’s say the stablecoin drops from the target price of $1 to $0.75. The algorithm will automatically burn a tranche of coins to introduce more scarcity, pushing up the price of the stablecoin.

These assets are less stable than fiat-backed stablecoins, and it is a good idea to keep tabs on how the underlying crypto asset behind your stablecoin is performing. One crypto-backed stablecoin is dai, which is pegged to the U.S. dollar and runs on the Ethereum blockchain. DeFi, or decentralized finance, in which transactions can be carried out without a middleman such as a bank or broker. And some stablecoins, such as Tether and USD Coin, are among those with the highest market capitalizations on the cryptocurrency market. This is one way digital stablecoins are pegged to real-world assets. The money in the reserve serves as collateral for the stablecoin – meaning whenever a stablecoin holder wishes to cash out their tokens, an equal amount of whichever asset backs it is taken from the reserve.

Why do people use stablecoins?

The USDC stablecoin is one of the two most primary stablecoins in the crypto market, along with Tether, and is supposed to hold a constant 1-to-1 peg to the U.S. dollar. On Saturday morning USDC’s value had dipped to 92 cents, and smaller stablecoins such as Pax Dollar and DAI also fell from their pegs, according to Bloomberg. Even though they are an integral part of crypto and enabled the creation of a new financial system, you shouldn’t underestimate the risks. We’ve seen stablecoin projects with failing pegs, missing reserves, and lawsuit problems. So while stablecoins are incredibly versatile tools, don’t forget they are still a cryptocurrency and hold similar risks.

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Some countries are even experimenting with creating their own stablecoins. As a stablecoin is a type of cryptocurrency, it will likely fall under the same regulations as crypto in your local jurisdiction. Issuing stablecoins with fiat reserves may also need regulatory approval. Especially banks and private firms like Facebook are gaining a lot of traction in the stablecoin market lately. Stablecoins are essentially an alternative to the cryptocurrency landscape that reduces price volatility.

But $3.3 billion of that roughly $40 billion stockpile is with Silicon Valley Bank, which has just become one of the largest US bank failures in recent history. Thus, despite the name, many stablecoins have historically lacked stability because the digital assets can be built to many different standards. Stablecoins such as TerraUSD, USDD, DEI and others crashed to zero in 2022 alone.

Their primary distinction is the strategy of keeping the stablecoin’s value stable by controlling its supply through an algorithm, essentially a computer program running a preset formula. Though Bitcoin remains the most popular cryptocurrency, it tends to suffer from high volatility in its price, or exchange rate. For instance, Bitcoin’s price rose from just under $5,000 in March https://xcritical.com/ 2020 to over $63,000 in April 2021 only to plunge almost 50% over the next two months. Intraday swings also can be wild; the cryptocurrency often moves more than 10% in the span of a few hours. Coinbase Global, one of the largest cryptocurrency exchanges, said on Friday that it would temporarily stop conversions of USDCs into U.S. dollars, with plans to resume on Monday.