Collapse of Silicon Valley Bank (SVB) – a comment by Bernhard Haslhofer

The collapse of Silicon Valley Bank (SVB) and the destabilization of stablecoins

It is yet unclear to what extent the collapse of Silicon Valley Bank (SVB) will cause contagion effects and affect other banks. However, it is already clear that recent events coincide with a remarkable event: the destabilization of stablecoins.

Stablecoins are specific cryptoassets backed by real-world currencies like the USD or the EUR. Prominent examples are USDC and Tether. Both have a market capitalization of more than 100 billion USD. The promise is that a customer owning one unit of a stablecoin can exchange it for one fiat currency unit (e.g., USD). The companies controlling the underlying asset management mechanism typically deposit their fiat holdings in banks. According to recent (yet unconfirmed) news, Circle, the company behind USDC, deposited roughly 3.2 billion USD at SVB [1]. That means part of the stablecoins holdings might have become de-pegged.

Coinciding with recent events around SVB, we are noticing that almost all major stablecoins have lost their peg to their underlying fiat currencies. USDC, for instance, reached a low of 0.8, which essentially means that one could buy 1 USD for 0.8 USD. This, of course, is an indicator for a major loss of trust, which also propagates across other stablecoins [2].

In our recent paper, we have shown that stablecoins are a cornerstone of many different DeFi protocols [3], which could be affected by run-on or a collapse of major stablecoins.