The stability of a banking system is essential to the global financial system and the operations of every fiat-backed stablecoin. The recent failures of Signature Bank and Silicon Valley Bank have caused concern in the crypto industry, leading to the depegging of the USDC stablecoin from $1.
In response to this crisis, Circle, the issuer of USDC, has been working tirelessly to restore liquidity operations for USDC, including bringing on new transaction banking partners to process minting and redemption requests.
Restoring USDC liquidity operations
Since the bank failures, Circle has been working around the clock to restore USDC liquidity operations. The company has been adding new transaction banking partners with 24/7/365 capability to process minting and redemption requests.
The company has also been working to strengthen the USDC reserve, which holds the cash portion of the reserve at BNY Mellon, except for limited funds held at transaction banking partners in support of USDC minting and redemption.
On March 13, Circle announced that it had redeemed $2.9 billion USDC and minted $0.7 billion USDC. The company is currently working through the backlog of requests and plans to keep its community updated on its progress.
U.S. government joint statement
The US government has taken steps to address the failures of Signature Bank and Silicon Valley Bank. On March 12, the US Treasury, Federal Reserve, and FDIC issued a joint statement confirming that the challenges being faced by the banks and their depositors would be successfully resolved with the approval of the US Treasury Secretary, Janet Yellen.
The statement assured depositors of the bank that they would be fully safeguarded and would be able to access their funds after March 13.
It also declared an equivalent risk exception for Signature Bank and confirmed that all depositors of the bank would be fully reimbursed.
The government’s response to these bank failures is a positive step forward in ensuring the stability of the banking system and the operations of fiat-backed stablecoins.
The flaws of fiat-backed stablecoins
The depegging of USDC from $1 exposed a crucial flaw in the design of existing fiat-backed stablecoins. Nevin Freeman, co-founder and CEO of Reserve, stated that a stable US banking system where deposits are safe and accessible is essential to the global financial system and the operations of every fiat-backed stablecoin.
The failure of a banking partner can lead to a loss of confidence in a stablecoin, causing its value to drop.
To prevent such occurrences, stablecoin issuers need to strengthen their reserves and ensure that they have robust risk management practices in place. It is essential to recognize the potential risks associated with fiat-backed stablecoins and take steps to mitigate them.