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The collapse of Silicon Valley Bank (SIVB) and other US banks led to a market-wide panic and a de-peg of USDC, which drained liquidity out of the crypto markets. However, liquidity vastly improved in markets after USDC regained its dollar peg, and crypto prices rallied higher over the past few days. 

How USDC Lost its Dollar Peg

On March 10, Silicon Valley Bank, one of the most popular lenders to Silicon Valley tech and growth startups, failed after suffering a bank run. The collapse sent shockwaves across financial markets and even impacted numerous crypto companies exposed to the bank.

For once, Circle, the issuer of the world’s second-largest stablecoin USDC, revealed that it has $3.3 billion in an account maintained by the bank. Following the revelation, USDC was hit with a wave of redemptions as concerns around reserves mounted, leading to the stablecoin losing its peg.

Data by CoinMarketCap shows USDC’s price, which is supposed to be pegged to $1, slid to an all-time low of around $0.8774 on March 11. However, the stablecoin started to recover gradually following an inflow of positive news. 

Specifically, US regulators announced a raft of emergency measures shortly after the collapse. The US Federal Reserve, Treasury Department, and the FDIC announced they would use the FDIC’s insurance funds to prevent depositors from losing money.

By March 13, USDC was almost near its $1 peg after the government’s assurance that depositors at the failed banks, including SVB, would be made whole. Jeremy Allaire, CEO of Circle, also praised the government’s intervention. He said in a statement:

“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.”

Currently, USDC is trading at $0.9984, according to data by CoinMarketCap. However, Circle has insured customers that USDC remains redeemable 1-to-1 with the US dollar.

Liquidity Improves in Crypto Markets after Circle Regains Peg

In the first few days of the USDC de-peg, liquidity in crypto markets halved as market participants pulled money out of the market. However, liquidity has dramatically improved over the past couple of days, largely due to USDC regaining its peg, according to a report by crypto data provider Kaiko.

The report said there was a massive spike of over $100 million in liquidity after the stablecoin regained its peg. More than $60 million of that tally belonged to the relisted USDC-USDT pair on Binance, while the USDC-USD pair on Kraken saw an injection of $20 million in liquidity, Kaiko noted. 

“Since then, there has been a gradual move upwards in overall liquidity as a result of the rally in crypto prices in the last week,” the report added. “With more liquidity comes less volatility as prices tend to have more support to both the upside and the downside.”

This comes as Bitcoin climbed above $28,000, its highest level in nine months, on Monday amid a rally that saw major cryptocurrencies gain more than 15% over the past week in the wake of the current chaos roiling the global banking system.

Meanwhile, Circle has chosen Cross River Bank, a venture capital-backed, FDIC-insured regional bank in New Jersey, as its new partner to mint and redeem USDC. The company has also “expanded relationships” with other banking partners to assist with USDC redemption, including Bank of New York Mellon (BNY Mellon).

More recently, Circle has revealed that it will use Paris as a base to expand in the European Union. During Paris Blockchain Week, CEO Allaire said France is the right center “both for commercial and policy reasons.”

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