Centralized exchange trading volumes for the USDC/USDT stablecoin pair surged 828% to $6.1 billion on 11 March 2023, as investors sought to switch from USDC to other tokens after the fallout of Silicon Valley Bank (SVB) in which Circle, the stablecoin issuer, held $3.3 billion of reserves.

USDC Faced Depeg After SVB Collapse

According to the newest market analysis published by CryptoCompare, the collapse of SVB has lifted the trading volume of the popular stablecoin, including decentralized exchanges. Additionally, CryptoCompare reported an increase in USDC trading against the US dollar.

SVB was shut down by the California Department of Financial Protection and Innovation on 10 March without any apparent reason for the sudden move. Reports suggest that the bank was facing severe liquidity problems and was on the verge of collapse. It emerged that the issuer of the USDC stablecoin, Circle, holds $3.3 billion (8%) of the funds backing the USDC in SVB.

The event triggered a market panic, leading investors to sell off their USDC tokens and switch to other commonly used stablecoins or the US dollar. Consequently, the stablecoin's value disconnected from its fixed exchange rate with the USD. At its lowest point, USDC traded for only 88 cents during the Saturday session. However, the situation stabilized on Monday, and the exchange rate has now reached $0.9994.

A study by CoinGecko showed that USDC supply dropped 9% amid the SVB crisis, while TUSD and DAI stablecoins gained the most traction. Their market supply rose by 57.4% and 27.4%, accordingly. DAI saw the most significant gain in interest with an increase of 1.35 billion in absolute terms. At the same time, USDT, TUSD, and FRAX followed with supply growth of 0.94 billion, 0.73 billion, and 0.69 billion, respectively.

High USDC Volatility and a Visible Jump in Trading Volumes

Although the situation seems to be contained, the past weekend brought above-average activity in the cryptocurrency market, as analyzed by CryptoCompare. Trading activity on the USDC/USDT pair increased more than eightfold, exceeding $6.1 billion.

"On 11 March, USDC-USDT centralized exchange trading volumes soared 828% to $6.1bn, as market participants looked to flee USDC and migrate to a 'safer' stablecoin. Moreover, the USDC-USD trading pair saw a substantial increase in trading volume during this time," CryptoCompare commented in its report.

There was a significant increase in decentralized exchange (DEX) volumes as well, from $7.14 billion on 10 March to $25.0 billion on 11 March, indicating a 249% surge. Alongside this, Ethereum gas fees observed a new high in 2023, reaching 101 Gwei, as there was an uptick in blockchain network activity.

Despite the temporary collapse of the market and its liquidity, there were no negative USDC outflows from traditional cryptocurrency exchanges. Ultimately, the overall fund flows turned positive for Circle's stablecoin.

"We attribute this to some traders trying to make arbitrage profit from the USDC peg as seen when analyzing trades using CryptoCompare trade data," CryptoCompare explained.

CryptoCompare's analysis concludes that recent events have shown that crypto is still heavily dependent on traditional finance, exposing the fragility of centralized stablecoins. Circle has proven to effectively manage its collateral reserves, which is essential for long-term confidence in its ability to navigate potential issues with traditional banking.

However, the collapse of SVB highlights the impact of the Federal Reserve's (Fed) interest rate hikes on the financial system, which has caused a Fed-induced crisis due to "inaccurate interest rate forecasts" and "the fastest interest rate hikes" in US monetary history.