The fall of Silicon Valley Bank (SVB), is said to be the largest bank failure since the 2008 financial crisis. Analysts have shared several reasons for its collapse, some citing its bond holdings and the bulk of its liquidity locked up in low-yielding assets. Other factors include the bank’s recent sale of over $20 billion USD in securities at nearly a $2 billion USD loss earlier in March.

Additional considerations include its client makeup, with the majority being corporate treasurers whose job is to manage money and guarantee a return of at least greater than or equal to Fed fund rates, which means with increases, they are happy to move funds elsewhere.

Whatever the case may be, the catalyst for SVB’s collapse was a bank run that took place on Thursday, March 9, seeing depositors initiate withdrawals of approximately $42 billion USD according to a variety of reports — which the bank was unable to meet liquidity needs for.

So what does this mean for Web3, crypto, and stablecoins like Circle’s USDC — why did it depeg and how can it recover?

Domino Effect

Known as the tech industries banker, SVB’s collapse is likely to have detrimental effects industry-wide, with a variety of startups and jobs possibly at risk of being lost.

Additionally, in the realm of crypto, stablecoin provider Circle also found itself at great risk and exposure due to the collapse, with roughly $3.3 billion USD in its USDC reserves being held at the bank. The figure, which makes up 8% of its total reserves put retail traders into a frenzy, with many looking to get out of the stablecoin — creating a short-term depeg from its one-to-one USD value.

As a result, some users took massive losses on swaps, with the largest of all being a holder that traded over $2 million USD in USDC for $0.05 USD in USDT.

With USDC insolvency fears rampant, users are fleeing to safety in other stables. Not all of them are going to make it there in one piece, however.

Here’s how one unlucky user paid $2,080,468.85 to receive $0.05 of USDT. pic.twitter.com/R8YdudWfsV

— BowTiedPickle.eth | Solidity Shipper (@BowTiedPickle) March 11, 2023

As explained by smart contract developer BowTiedPickle, the user did initiate their swap through a questionable medium, as they were holding their funds in an interest-gaining liquidity pool and instead of selling their LP tokens for USDT at a six percent slippage, they decided to utilize a swap aggregation router but did not set slippage properly — resulting in a nearly complete loss of funds.

While this particular case was an anomaly, it does show the risk human error can still play in the crypto industry and the amount of progress yet to be made in user interfaces that can help to alert the holder of such outcomes.

As for Circle itself, its CEO Jeremy Allaire tweeted that “Circle’s USDC operations will open for business on Monday morning, including with new automated settlement via our new partnership with Cross River Bank,” adding that the stablecoin is free of risk from SVB’s collapse due to joint decision by the U.S. Treasury, Federal Reserve, and FDIC, to make depositors to SVB whole.

On March 12, regulators state that “all depositors of this institution will be made whole,” adding that they are “taking decisive actions to protect the U.S. economy by strengthening public confidence in our banking system.”

The regulators also stated that no losses will be borne by taxpayers — as for SVB, Treasury Secretary Janet Yellen shared that depositors are the primary focus and that a government bailout for the bank is off the table, stating “we’re not going to do that again.”

On behalf of Circle, Allaire shared that “we are heartened to see the U.S. government and financial regulators take crucial steps to mitigate risks extending from the banking system. We’ve long advocated for full-reserve digital currency banking that insulates our base layer of internet money and payment systems from fractional reserve banking risk.”

Sharing details about its USDC reserve makeup, Circle stated on March 11 that 77 percent of it, or roughly $32.4 billion USD is currently collateralized with short-dated U.S. Treasury Bills — which are said to be the most liquid assets in the world as the U.S. government is directly obligated to secure them.

At the time of writing this bulk of Circle’s reserves is held in custody by BNY Mellon, with active liquidity and asset management overseen by BlackRock. Additionally, the stablecoin issuer’s cash portion of its reserves, 23 percent or 9.75 billion USD, is now said to be held at BNY Mellon.

Circle shared that anyone can view its liquidity ladder and monthly USDC attestation reports at its website under the Trust & Transparency section.

At the time of writing, at least for USDC and Circle, it would appear that a crisis has been averted thanks to regulators, although the domino effect the collapse could have on the rest of the banking system and tech industry, in general, has yet to be seen.

In other news, a draft of crypto’s most hopeful regulatory bill to be released in April.