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Bank Runs & USDC De-peg
by Matthew Harcourt
Below is an update on the tumultuous events of this past weekend and their impacts on Apollo Crypto. As of the time of publishing, Apollo Crypto did not realise any losses from these events.
Silicon Valley Bank:
The biggest headline of the weekend was the collapse of Silicon Valley Bank (SVB), a top 20 US bank that was home to the deposits of the majority of venture backed start ups from US and the world. The bank suffered a collapse due to losses incurred from its exposure to long-term US Treasuries. The sharp increase in interest rates in recent months led to a decline in the value of these treasuries, and the bank was forced to realise losses from the asset sales meant to shore up liquidity. A large-scale bank run was triggered on 8 March when it announced a US$1.75 billion capital raising.
The overall uncertainty in the US banking system has spread to Signature Bank, which is the bank Apollo Crypto uses for the Apollo Crypto Frontier Fund and Apollo Crypto Market Neutral Fund. The bank has now been closed by regulators and taken over by the Federal Deposit Insurance Corporation (FDIC). Apollo Crypto does not hold significant assets with Signature Bank and will incur no losses. However, the situation will place strain on USD fiat applications and redemptions for the time being. We are still able to process applications and redemptions in crypto assets.
In the wake of SVB’s collapse, Circle, the issuer of the stablecoin USDC, revealed that it had a US$3.3 billion exposure to SVB due to its use of the bank’s services to hold reserves for the USDC stablecoin. This US$3.3 billion represented around 8% of USDC’s backing. USDC fell as low as 87 cents on Saturday 11th March, but recovered over the next few days as it became increasingly clear that USDC would remain fully backed. With the FDIC announcing that all depositors will be made whole at SVB, USDC is back trading between $0.99 to $1.
Throughout the market panic, we made three key decisions when it came to our USDC exposure:
- Withdraw from liquidity pools containing USDC with other assets, this stopped our USDC exposure from growing due to the mechanics of liquidity pools;
- Pay down debt where USDC was held as collateral, avoiding liquidation;
- Hold our USDC and not realise losses driven by the panic in the market.
We made the decision to hold on to our USDC based on a few key reasons:
- The resulting loses from Circle’s $3.3 billion exposure to SVB was likely to be a very small fraction of the 8%, meaning that the collateral backing of USDC was at the very least $0.98;
- Due to the size and importance of SVB, we placed a high probability on US government intervention of some form;
- Circle is a very profitable business with strong investors, meaning there are a variety of different actions the business could take to ensure USDC holders would be made whole.
We continue to actively monitor developments related to the events mentioned above and remain confident in USDC to hold its peg of $1 at this time. We are actively looking to establish additional banking relationships and will update investors directly regarding Signature Bank’s closure and its impact.