By Elizabeth Howcroft and RISHABH JAISWAL
LONDON (Reuters) -Stablecoin USD Coin (USDC) lost its dollar peg and slumped to an all-time low on Saturday before recovering most of its losses after Circle, the firm behind it, assured investors it would honor the peg despite exposure to failed Silicon Valley Bank.
Circle said in a tweet on Friday it has $3.3 billion of its $40 billion of USDC reserves at Silicon Valley Bank. On Saturday, the cryptocurrency company said in a blog post that USDC liquidity operations will resume as normal when banks open on Monday morning in the United States.
"As a regulated payment token, USDC will remain redeemable 1 for 1 with the U.S. Dollar", the company said in a blog post.
The cryptocurrency firm said that in the event the bank does not return 100% of deposits, it will cover any shortfall using corporate resources, involving external capital if necessary.
The coin, which broke its 1:1 dollar peg and fell as low as $0.88 shortly after 0800 GMT (3 a.m. EST) on Saturday, according to market tracker CoinGecko, recovered to trade around $0.97 by 2100 GMT.
Silicon Valley Bank collapsed on Friday in the largest U.S. bank failure since the 2008 financial crisis, roiling global markets and stranding billions of dollars belonging to companies and investors.
Circle said in a tweet on Friday that the company and USDC "continue to operate normally" while the firm waits for clarity on what will happen to Silicon Valley Bank depositors.
Meanwhile, U.S. crypto exchange Coinbase (NASDAQ:COIN) said in a tweet it was not allowing USDC to be exchanged for U.S. dollars over the weekend while banks are closed, citing "heightened activity", while it plans to resume swaps on Monday.
Joseph Edwards, investment advisor at Enigma Securities, said the situation was "extremely serious" for USDC.
"No matter how sound Circle's operations are, this sort of depeg on a stablecoin tends to fundamentally undermine confidence in it," Edwards said.
"The short-term implications here are dramatic and unknowable, especially once systems start to have to be adjusted to the reality that 1 USDC isn't trading at 1 USD for the time being."
CONSTANT EXCHANGE RATE
Stablecoins are cryptocurrencies designed to maintain a constant exchange rate with "fiat" currencies - those backed by a central government rather than a physical commodity such as gold - for example through a 1:1 U.S. dollar peg.
Used in cryptocurrency trading, they have surged in value in recent years. USDC is the second-biggest stablecoin with a market cap of $37 billion. The largest, Tether, has a market cap of $72 billion, according to CoinGecko.
USDC's price usually holds close to $1, making Saturday's drop unprecedented. According to CoinGecko data, its previous all-time low was around $0.97 in 2018, though in 2022 it fell just below $0.99 when cryptocurrency markets were roiled by the collapse of crypto hedge fund Three Arrows Capital.
Traders have been on guard this week for signs of contagion in the financial sector and beyond from troubles for Silicon Valley Bank and crypto-focused Silvergate, which this week disclosed plans to wind down operations and voluntarily liquidate.
Boston-based Circle said last week it had moved a "small percentage" of USDC reserve deposits held at Silvergate to its other banking partners.
The chief executive of cryptocurrency exchange Binance said in a tweet on Friday it had no exposure to Silicon Valley Bank, as did Tether Chief Technology Officer Paolo Ardoino.
Stablecoin issuer Paxos and crypto exchange Gemini also tweeted that they do not have relationships with the bank.