Crypto Market Liquidity Improved Significantly as USDC Regains Dollar Peg

The cryptocurrency market has seen a significant improvement in liquidity recently, following USDC (USD Coin) regaining its dollar peg, which led to a rally in crypto prices over the past few days. The recovery came after the collapse of Silicon Valley Bank and several other US banks caused market panic, leading to a de-peg of USDC from the dollar, causing liquidity to be drained out of the crypto markets.

Silicon Valley Bank was one of the most popular lenders to Silicon Valley tech and growth startups. The bank was seized by regulators in March after suffering a bank run, which impacted a handful of crypto companies exposed to its collapse. Circle, the issuer of the world’s second-largest stablecoin, USDC, revealed that it had $3.3 billion in an account maintained by the bank, leading to concerns about its reserves. As a result, USDC went through a period of redemptions, and the stablecoin lost its dollar 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.

USDC was almost near its $1 peg by March 13, following the government’s assurance that depositors at the failed banks, including SVB, would be made whole. Jeremy Allaire, CEO of Circle, praised the government’s intervention, saying, “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. Circle has insured customers that USDC remains redeemable 1-to-1 with the US dollar.

The de-peg caused liquidity in crypto markets to halve, as market participants pulled money out of the market, leading to a dramatic drop in liquidity. However, liquidity has 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 rally came as Bitcoin climbed above $28,000, its highest level in nine months, on Monday. Major cryptocurrencies gained more than 15% over the past week amid the current chaos roiling the global banking system.

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.”

In summary, the market-wide panic caused by the collapse of Silicon Valley Bank, leading to a de-peg of USDC from the dollar, has drained liquidity out of the crypto markets. However, liquidity vastly improved in markets after USDC regained its dollar peg, leading to a rally in crypto prices over the past few days. Circle, the issuer of the world’s second-largest stablecoin USDC, has insured its customers that USDC remains redeemable 1-to-1 with the US dollar.


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