USDC’s depegging exposed a 'crucial flaw' with existing fiat-backed stablecoin design, one founder said

After USDC depegged from $1 last week, many in the crypto industry are questioning whether Silicon Valley Bank’s collapse will have bigger implications on the stablecoin ecosystem.

The supposedly stable stablecoin USDC initially depegged Friday and fell as low as 88 cents on Saturday due to uncertainty around the $40 billion USDC empire, the second largest stablecoin by market cap. Circle, the issuer of USDC, shared that $3.3 billion, or about 8.2%, of its total USDC reserves were held at SVB. Circle later announced that the reserve risk was “removed” since the funds became available on Monday morning.

USDC’s depeg over the weekend exposed a crucial flaw with existing fiat-backed stablecoin design, Nevin Freeman, co-founder and CEO of Reserve, said.

“If any one of the banks that the stablecoin issuer relies on fails without a bailout, and the issuer can’t fill the hole with their own capital or a new capital injection, that would either force a bank run on the stablecoin and leave the last to redeem with nothing, or the issuer would have to close down and go into bankruptcy to prevent such a run,” Freeman told TechCrunch+. “This isn’t the fault of stablecoin issuers; they have no choice but to rely on fractional reserve banks when providing liquidity to their users.”

Over the weekend, USDC’s price acted as a live prediction market for whether SVB depositors would be made whole, Freeman said. Soon after the Federal Deposit Insurance Corporation and the U.S. Federal Reserve announced that depositors would be made whole, the stablecoin rallied from 97 cents to 99 cents, and only upon banks opening and actually operating did it recover to $1, he noted.