It is still unclear how USDC will fare after Silicon Valley Bank’s collapse, as many in the crypto industry are wondering whether their collapse will have larger implications on the stablecoin ecosystem. Some analysts anticipate that this event could lead to increased volatility and decreased trust in stablecoins, while others believe that there are already structural weaknesses within this market that were only exacerbated by Silicon Valley Bank’s implosion.
The instability of the stablecoin USDC may have been due to Circle’s holdings of SVB. Circle later announced that the reserve risk was “removed” since the funds became available on Monday morning.
Freeman believes that the USDC flaw exposes the need for a new type of stablecoin that is backed not by fiat currencies, but by commodities or assets like gold. This would provide a more reliable and stable store of value, he said.
If a fractional reserve banking system collapses, the stablecoin issuer will likely go into bankruptcy to protect their users. However, this is not always possible and in cases where the stablecoin issuer relies on a single bank for liquidity, they could find themselves in a difficult position if that bank goes bankrupt.
This demonstrates how markets can act as a live prediction market for major events, such as when depositors will be made whole. The price of USDC recovered only after the banks actually opened and operated, demonstrating the importance of timely notification to ensure accurate price movements.
SVB’s mess could become stablecoins’ problem. Given that the insurer is a central authority in the SVB platform, it may become difficult for stablecoin projects to find a reputable custodian to hold their tokens. This could lead to volatility and instability in the SVB token market, which would be detrimental to those using stablecoins as an investment vehicle.
