The collapse of Silicon Valley Bank (SVB), following massive withdrawals by depositors, sent shockwaves through global financial markets. This crisis quickly rippled into the cryptocurrency space via Circle's stablecoin, USDC, which held reserves at the failed bank. Concerns mounted as USDC temporarily lost its dollar peg, raising doubts about the stability of even the most trusted digital assets.
However, confidence was partially restored when it was confirmed that Circle’s reserves were secure. Both centralized and decentralized crypto markets experienced significant turbulence in the aftermath. US regulators stepped in, taking over SVB and Signature Bank—a notable crypto-friendly institution—to prevent further panic and systemic risk, evoking memories of the 2008 financial crisis and the early pandemic-era responses.
Within 48 hours, emergency measures were introduced. Regulators guaranteed all deposits held at SVB and Signature Bank. The Federal Reserve also launched a new lending facility to bolster other banks and ensure depositors’ needs would be met.
Understanding Market Depth and Liquidity Shocks
Market depth refers to the volume of buy and sell orders available at different price levels, serving as a key indicator of market liquidity. A decline in market depth is a major concern for cryptocurrency traders, as it can lead to higher volatility and increased difficulty in executing large orders without affecting market prices.
According to market data from Kaiko, major cryptocurrency exchanges saw a significant drop in market depth due to disruptions in USD payment channels and the failure of several crypto-friendly banks. Coinbase and Binance were among the most affected, with market depth falling by 50% and 29%, respectively. Binance Global also experienced a 13% decrease.
These disruptions highlight ongoing vulnerabilities within the crypto industry’s banking partnerships and have raised broader questions about stability and operational reliability.
The Impact on Stablecoins
Circle’s USDC Struggles
Circle, the fintech company behind USDC, faced a major challenge when it revealed that $3.3 billion—approximately 8.2% of its $40 billion in USDC reserves—was held at SVB. This news triggered industry-wide anxiety and led to a surge in redemption requests.
Blockchain intelligence firm Arkham reported record-breaking redemptions, with $723.5 million in USDC sent to a burn address in a single day. Between Friday and Monday, over $6.2 billion in USDC was redeemed, with only about $1.66 billion minted—resulting in a net reduction of nearly $4.5 billion.
Several major exchanges temporarily suspended USDC-related services. Binance paused automatic conversions of USDC to BUSD, while Coinbase halted conversions of USDC to US dollars. Robinhood also suspended deposits and trading in USDC. As a result, USDC depegged from the US dollar, falling to an all-time low of $0.87 on March 13.
Broader Stablecoin repercussions
The uncertainty around USDC had a domino effect on other stablecoins:
- USDD: Tron’s USDD stablecoin also lost its peg, dropping to around $0.93 as investors rushed to sell.
- DAI: As a stablecoin partially backed by USDC, DAI fell to approximately $0.90 before recovering.
In response, many traders turned to Tether (USDT), the largest stablecoin by market cap, which stated it had no exposure to SVB. Still, longstanding concerns around Tether’s commercial practices and reserve transparency persisted.
Market sentiment began improving after Circle announced it would use corporate resources to cover any potential shortfalls. Both USDC and DAI reclaimed their pegs, trading close to $1 once again.
It’s worth noting that only around 8% of USDC’s reserves were affected, and with Circle confirming additional resources, the likelihood of a full devaluation remained low.
Regulatory Response and Market Recovery
The FDIC took control of SVB to protect depositors’ funds. The agency announced it would make advance payments to uninsured depositors by the following week, with additional payments possible as the bank’s assets were sold.
The series of US bank failures initially sparked fear, uncertainty, and doubt (FUD) among crypto investors, leading to sharp declines in major digital assets including Bitcoin (BTC) and Ethereum (ETH).
President Biden addressed the public, assuring that all depositors would be made whole in time. Market response was strongly positive: BTC and ETH rallied more than 15% within hours. Biden also noted that investors in the failed banks would not be protected, emphasizing that they had assumed the risk.
At the time of writing, Bitcoin had surged past $24,700, with its market cap exceeding $500 billion and a dominance rate of 43.7%. Ethereum saw net inflows of approximately $1 billion, with $50.6 million entering exchanges.
Meanwhile, Tether (USDT) experienced a net outflow of $226.9 million from exchanges, with $1.5 billion in deposits overshadowed by $1.7 billion in withdrawals.
Binance Coin (BNB) also posted significant gains, rising 13% in 24 hours to trade at $316.83 with a daily volume of $1.32 billion.
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Frequently Asked Questions
What is market depth in cryptocurrency trading?
Market depth measures the quantity of buy and sell orders lined up at different prices. High market depth suggests better liquidity and stability, while low depth can lead to volatility and slippage.
Why did USDC lose its dollar peg?
USDC temporarily depegged when its issuer, Circle, disclosed that $3.3 billion of its reserves were held at Silicon Valley Bank after its collapse. This led to a panic and mass redemptions until the situation was clarified.
How did regulators respond to the bank failures?
US regulators insured all deposits—including those exceeding the FDIC’s $250,000 limit—at SVB and Signature Bank. The Fed also introduced a new lending program to help other banks meet withdrawal demands.
Did Bitcoin benefit from the banking crisis?
In the short term, yes. Bitcoin and several other major cryptocurrencies rose significantly following the government’s intervention, as some investors viewed crypto as an alternative to traditional banking.
Is USDC fully backed now?
Circle has stated that all USDC in circulation is fully backed by reserves and that corporate resources will cover any shortages related to SVB. USDC has since returned to its $1 peg.
What was the impact on other stablecoins?
Several stablecoins, including DAI and USDD, experienced temporary depegging due to their direct or indirect reliance on USDC. Most recovered their pegs after Circle’s announcements.