The Fed’s Silicon Valley Bank Post-Mortem Explores How Stablecoin Depegs Become Contagious

Key Takeaways

• The Federal Reserve has published its post-mortem investigation of the Silicon Valley Bank failure.

• When the slope collapsed earlier this year, it triggered a tally connected USDC that caused the stablecoin to depeg from the dollar.

• The Fed study explores however the USDC depeg dispersed contagiously crossed different stablecoins.

The Federal Reserve has published a elaborate investigation examining the Silicon Valley Bank (SVB) nonaccomplishment of March 2023 and however it rippled done the stablecoin market.

The study highlights however stablecoins that are designed to reliably way the dollar are susceptible to assurance shocks, contagion, and self-reinforcing withdrawals, conscionable similar accepted slope deposits.

The Fed’s post-mortem recounts however SVB’s illness triggered a swift tally not lone connected the slope itself but besides connected 1 of the largest stablecoins, USDC.

When Circle disclosed that it could not entree uninsured reserves held astatine SVB, marketplace participants rushed to redeem their USDC for cash. 

While Circle was capable to support up with redemption requests during mean concern hours, panic continued to acceptable successful implicit the pursuing weekend, erstwhile superior redemptions weren’t available.

On these days, efforts to trim USDC vulnerability created unsustainable merchantability unit connected secondary markets, causing the stablecoin to temporarily commercialized beneath the dollar.

A cardinal penetration from the Federal Reserve’s investigation is however accent successful 1 stablecoin tin propagate to others done ecosystem interlinkages. 

For instance, USDC’s depeg rapidly transmitted to Dai, which is tied to USDC done astute declaration vaults designed to support dollar parity.

At the tallness of the SVB crisis, mechanisms intended to stabilize prices nether mean conditions became channels for contagion.

As traders sought to exit their USDC positions, liquidity drained from these facilities, exerting unit connected Dai’s peg arsenic well.

The Fed study concludes that accent events successful digital-asset markets tin impact two-way feedback betwixt accepted and decentralized concern sectors.

In this case, a tally connected a accepted slope helped trigger a tally connected stablecoins, which past reverberated done DeFi protocols. 

While they stopped abbreviated of prescribing circumstantial regulatory measures, the authors called for further probe to amended recognize however fiscal contagion tin transverse the DeFi–TradFi bound arsenic stablecoins go progressively integrated into mainstream finance.

The station The Fed’s Silicon Valley Bank Post-Mortem Explores How Stablecoin Depegs Become Contagious appeared archetypal connected ccn.com.