Stablecoin Market Affected by Silicon Valley Bank Collapse, According to Fitch Ratings

Volatility, loss of investor confidence, and temporary depegging occur as bankruptcy spreads to stablecoin market.

Credit rating agency Fitch Ratings has reported that the failure of several banks, including the collapse of Silicon Valley Bank, had a significant impact on stablecoins.

In March 2023, there was considerable volatility, loss of investor confidence, and temporary depegging as the bankruptcy of Silicon Valley Bank spread to the stablecoin market. For example, the market capitalization of USD Coin (USDC) fell by over 25% in the first quarter. Despite this, USDC managed to recover its peg after Circle’s admission that USD3.3 billion of reserves backing USDC were deposited at SVB. Coinbase temporarily halted exchanges between USDC and fiat currency until all SVB depositors were made whole by the US Federal Deposit Insurance Corporation. However, USDC’s market capitalization still fell by over 25% in 1Q23 and remains depressed.

Data from The Block shows that the total supply of stablecoins decreased from $138 billion at the beginning of the year to $124 billion as of July 3, highlighting the challenges faced by stablecoins in maintaining stability. In contrast, Tether’s USDT market capitalization rose by 12% over the same period, capturing about 72% of USDC’s redemption volume and indicating a growing preference for Tether among investors. Despite Tether’s positive performance, the top 10 stablecoins experienced a decline in their monthly average of daily trading volumes from $53 billion to $28 billion from March to May 2023. This decrease in activity within the stablecoin market may be driven by cautious investor sentiment in light of ongoing market uncertainties.

Efforts to regulate stablecoins have been unfolding at different speeds in the United States and Europe, resulting in notable differences in reporting and transparency standards. The contrasting approaches taken by the two regions have created distinct regulatory landscapes for stablecoins, with direct consequences on their reporting and transparency practices.