A recent banking crisis caused a depegging event for major stablecoins, leading to concerns about the stability of these assets amid a US banking crisis.
Stablecoins restored their peg after the US government stepped in and ensured depositors would be made whole, in a move meant to stop other entities from suffering irreparable damage.
The crisis may have strengthened stablecoins in traditional finance, and could lead to a push for FDIC insurance to boost crypto adoption and a need for more stablecoin options.
The recent stablecoin de-pegging event and subsequent banking crisis have raised concerns about the stability of digital assets, especially as they relate to traditional finance. The collapse of Silicon Valley Bank (SVB) caused the second-largest stablecoin by market capitalization, USD Coin (USDC), to plunge to $0.87, leading many to question the strength of the system. However, stablecoins were eventually restored to their peg after the United States government intervened and ensured depositors at SVB and Signature Bank would be made whole.
While the U.S. government’s bailout helped stabilize stablecoins, many pointed out that taxpayers would ultimately bear the cost of the bailout. Additionally, the banking crisis has raised concerns about the stability of financial institutions, leading investors and depositors to question the safety of other banks, such as Deutsche Bank and Credit Suisse.
Update thread on USDC— Jeremy Allaire (@jerallaire) March 12, 2023
We were heartened to see the US government and financial regulators take crucial steps to mitigate risks extending from the fractional banking system.
100% of deposits from SVB are secure and will be available at banking open tomorrow.
The crisis has implications for the future of digital assets, particularly stablecoins. If the Federal Deposit and Insurance Corporation (FDIC) were to extend insurance to crypto-related institutions, it could alleviate concerns about the security of digital assets under their custody. Furthermore, if stablecoins are to be considered a reliable alternative to traditional finance, the industry must be regulated to ensure it can weather market fluctuations.
CEX.io’s spokesperson, Becky Sarwate, believes that the crisis could be a boon for digital assets, offering an alternative set of benefits that could appeal to nervous investors. However, she acknowledged that digital assets lack some of the protections seen in traditional finance and noted the importance of shoring up markets and confidence, protecting consumers, and ensuring that outcomes prove the stress test could have been weathered by traditional financial firms and Circle.
Lucas Kiely, chief investment officer of Yield App, noted that the recent depeg event can be largely attributed to fears around liquidity, as most stablecoins are essentially an IOU note backed by securities that holders don’t have a lien on. Additionally, Danny Talwar, head of tax at crypto tax calculator Koinly, believes that stablecoins may temporarily suffer from a lack of confidence over the short to medium term following the mini-bank run.
Overall, the recent crisis highlights the need for regulation and oversight of digital assets. The stability and soundness of the banking system are critical to dollar-backed stablecoins, and the industry must work to ensure that it can weather market fluctuations and offer a reliable alternative to traditional finance.