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Amid the madness of the last 24 hours, with the USDC stablecoin depegging and fears over how much this will impact the wider crypto market, there was a peculiar trade that stood out.

In it, one crypto user swapped $2 million for just $0.05. Another then took advantage of the resulting situation and swapped $1.45 for $2 million. The two users did not directly trade against each other but into a highly illiquid pool of funds.

What happened was the first user tried to make a swap of $2 million of 3CRV tokens — a token that represents three stablecoins — into USDT, as noted by Twitter user BowTiedPickle. They used a service called KyberSwap, which aggregates different token swap applications.

This user failed to implement proper slippage protections. This is what stops a trade that’s too far below what the user is willing to accept from being executed. It’s the same issue that caused a trader earlier this month to lose all of their funds in a trade.

The swap was sent to a highly illiquid pool that hadn’t been used in 251 days, BowTiedPickle highlighted. The pool only contained about $2 of liquidity — nowhere near enough to swap $2 million of tokens.

Since this is a Curve pool, the trades are calculated automatically based on pre-defined rules. In this case, the user was awarded $0.05 of USDC, which was then swapped into USDT, and the highly unprofitable trade was complete.

An MEV bot strikes fast

After the trade had taken place, the Curve pool was unbalanced with far too many 3CRV tokens and not enough USDC.

This created an opportunity for whoever was able to strike first. In this case, a second user quickly intervened, swapping just $1.45 of USDC for the $2 million of 3CRV tokens — bringing the pool back so that it was balanced. All of this is because Curve pools are focused on the ratios between tokens, instead of simply their market value.

The user spent $45 in transaction fees but paid 23 ether ($33,000) in tips to validators that processed the transactions — encouraging them to prioritize the transaction over others.

© 2023 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

Global asset management firm Brevan Howard is taking over a hedge fund spun off from crypto investment company Dragonfly Capital.

Brevan Howard, which manages more than $30 billion in assets, has entered into an agreement to assume control of Dragonfly’s “Liquid Opportunities” fund, according to unidentified people cited by Bloomberg.

The long-short strategy fund was established in June 2021 and managed by Kevin Hu, Ashwin Ramachandran and Lawrence Diao. Hu’s LinkedIn profile describes his current role as Chief Investment Officer at Nova Digital, a Brevan Howard fund. Liquid Opportunities will operate under Brevan Howard’s crypto and digital assets division, compatible with its active trading approach, Bloomberg reported, citing people familiar with the matter.

An internal Dragonfly document reviewed by Bloomberg said: “After extensive discussions, we decided that Brevan Howard, one of the largest hedge funds in the world, was the right long-term home for Kevin and his team.”

Kevin Hu’s move from Dragonfly to Brevan Howard, alongside the rest of its liquid strategies team, was reported by The Block in January, with a focus on investing in listed digital assets based out of the firm’s new Abu Dhabi office. 

© 2023 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

The fallout from the collapse of Silicon Valley Bank spread overnight to the USDC stablecoin, which lost its peg to the U.S. dollar and dropped as low as $0.88.

Following Circle’s disclosure that it has $3.3 billion of USDC’s reserves with the failed Silicon Valley Bank, investors scrambled to exit their USDC holdings. They swapped them into alternative stablecoins like Tether’s USDT or chose to exit the crypto market entirely into fiat, causing USDC’s biggest depeg since its inception in 2018 and its market cap to fall below $40 billion — down more than 15% in the last 24 hours.

Demand for USDT caused it to move in the opposite direction on some exchanges, spiking to $1.06 against the dollar at one point on Kraken.

Remaining below peg

Currently, USDC and DAI are at $0.90. Tether is keeping its peg well, while most other stablecoins are seeing minor drops from their pegs. Overnight, USDC and DAI fell as low as $0.88 before rebounding.

The $3.3 billion held at Silicon Valley Bank, which has become the largest bank to fail since 2008, is part of Circle’s $40 billion reserves, amounting to some 8.25% — roughly the size of the depeg.

Following the disclosure, Coinbase halted its conversion feature between U.S. dollars and USDC until after the weekend. This was due to heightened activity. Binance has also suspended auto-conversion of USDC into BUSD due to high inflows.

A lot of USDC has been burned. Nansen noted that $2.34 billion had been burned in the last 24 hours, while $366 million was minted during that time. This suggests that big traders are redeeming their stablecoins for dollars with Circle.

If USDC were to fall much further, the repercussions across the crypto market could intensify. According to DeFiLlama, if it fell below $0.865, for example, $50 million in USDC collateral would be liquidated on DeFi lending platforms like Aave and Compound (unless further collateral is provided).

It wasn’t just centralized exchanges where the impact was felt, either, with Ethereum transaction fees jumping around tenfold as USDC holders rushed for the exits.

Addresses labeled by Etherscan as belonging to high-profile crypto personalities like Tron founder Justin Sun were also tracked swapping millions in USDC for other stablecoins.

Backed by USDC

While DAI is a decentralized stablecoin, it’s collateralized by other stablecoins — the biggest among them USDC. The stablecoin is about 36% backed by USDC, according to daistats.

During the depegging events, some traders used their USDC as collateral to generate DAI, through its peg stability module. This has now reached its cap of 3.1 billion USDC, so no more DAI can be minted with USDC.

Frax, another decentralized stablecoin that’s also partly backed by USDC, was down to $0.90.

Unbanking the banks

On Friday, Silicon Valley Bank, which banked crypto firms as well as start-ups and venture capitalists, plunged 63% in pre-market trading before being halted after companies were urged to pull funds from the bank. Silicon Valley Bank was then closed by the California Department of Financial Protection and Innovation, with the Federal Deposit Insurance Corporation appointed as the receiver.

Silicon Valley Bank was the second crypto-friendly bank to fail this week after Silvergate Bank confirmed it was voluntarily liquidating and winding down operations.

© 2023 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

Episode 21 of Season 5 of The Scoop was recorded remotely with The Block’s Frank Chaparro and Dragonfly Capital Legal Counsels Jessica Furr and Bryan Edelman.

Listen below, and subscribe to The Scoop on Apple, Spotify, Google Podcasts, Stitcher, or wherever you listen to podcasts. Feedback and revision requests can be sent to podcast@theblockcrypto.com.

Jessica Furr and Bryan Edelman are legal counsels for crypto-focused VC firm Dragonfly Capital.

In this episode, Furr and Edelman break down several crypto court cases that are set to answer critical legal questions for the first time and explain why 2023 is becoming a turning point for crypto regulation and legislation in America.

During this episode, Chaparro, Edelman, and Furr also discuss:

• The SEC’s “cherrypicking” approach to regulation
• Updates on crypto bankruptcy cases
• How IP rights relate to NFTs

This episode is brought to you by our sponsors Circle, Railgun, Flare Network

About Circle
Circle is a global financial technology company helping money move at internet speed. Our mission is to raise global economic prosperity through the frictionless exchange of value. Visit Circle.com to learn more.

About Railgun
Railgun is a private DeFi solution on Ethereum, BSC, Arbitrum and Polygon. Shield any ERC-20 token and any NFT into a Private Balance and let Railgun’s zero-knowledge cryptography encrypt your address, balance and transaction history. You can also bring privacy to your project with Railgun SDK, and be sure to check out Railgun with partner project Railway Wallet, also available on iOS and Android. Visit Railgun.org to find out more.

About Flare
Flare is an EVM-based Layer 1 blockchain designed to allow developers to build applications that can use data from other blockchains and the internet. By providing decentralized access to a wide variety of high-integrity data from other blockchains and the internet, Flare enables new use cases and monetization models. Build better and connect everything at Flare.Network.

© 2023 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

Coinbase said Friday evening that it halted support for conversions between U.S. dollars and stablecoin USDC.

“We are temporarily pausing USDC:USD conversions over the weekend while banks are closed,” the firm said in a tweet. “During periods of heightened activity, conversions rely on USD transfers from the banks that clear during normal banking hours.”

The firm typically offers traders a features that allows them to seamlessly exchange USD for USDC. Coinbase plans to restart the feature on Monday. 

The news came moments after Circle confirmed its USDC had exposure to Silicon Valley Bank, which earlier Friday became the largest bank to fail since the 2008 financial crisis. California’s financial regulator seized control of the bank Friday and put it in FDIC receivership. Silicon Valley Bank’s collapse came shortly after crypto-friendly Silvergate said it was liquidating. 

“Silicon Valley Bank is one of six banking partners Circle uses for managing the ~25%  portion of USDC reserves held in cash,” Circle said in a tweet late Friday. “While we await clarity on how the FDIC receivership of SVB will impact its depositors, Circle & USDC continue to operate normally.”

Circle later said in a tweet that its exposure stood at $3.3 billion. 

“Following the confirmation at the end of today that the wires initiated on Thursday to remove balances were not yet processed, $3.3 billion of the ~$40 billion of USDC reserves remain at SVB,” Circle said in a tweet. 

Circle and Coinbase both manage USDC, which was founded in 2018.

© 2023 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

Circle, the crypto payments firm behind stablecoin USDC, confirmed late Friday evening that $3.3 billion of the cash backing its coin remain with Silicon Valley Bank. 

Circle, which had early tweeted that Silicon Valley Bank was among its six banking partners managing about 25% of the total reserves of USDC, was criticized by “Crypto Twitter” for not being more transparent about its exposure to the popular tech banker. In the wake of its original tweet, USDC de-pegged from $1, falling around 2% on certain decentralized finance platforms. 

“Following the confirmation at the end of today that the wires initiated on Thursday to remove balances were not yet processed, $3.3 billion of the ~$40 billion of USDC reserves remain at SVB,” Circle said in a tweet. 

“Like other customers and depositors who relied on SVB for banking services, Circle joins calls for continuity of this important bank in the U.S. economy and will follow guidance provided by state and Federal regulators.”

Silicon Valley Bank, which ranks many tech companies and startups among its clients, became the largest bank to fail since the 2008 financial crisis on Friday, and the FDIC seized control. Silicon Valley Bank’s collapse came shortly after crypto-friendly Silvergate said it was liquidating. Circle also counted Silvergate as a banking partner.

© 2023 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

Crypto lender BlockFi has $227 million in “unprotected” funds in Silicon Valley Bank, according to a bankruptcy document, and may be in violation of U.S. bankruptcy law.

The bank was shut down by a California regulator on Friday morning after investors, spooked by the bank’s moves to shore up its balance sheet, began withdrawing funds.  

That $227 million is also not insured by the Federal Deposit Insurance Corporation since it is in a money market mutual fund, the U.S. Trustee overseeing BlockFi’s Chapter 11 bankruptcy case said in the filing. The standard deposit insurance amount is $250,000 per depositor, per insured bank for each account ownership category, according to the FDIC’s website.  

A balance summary statement provided by the bank for that account said, “money market mutual fund investments are: not a deposit, not FDIC insured, not insured by any federal government agency, not guaranteed by the bank, may lose value.”  

Earlier this year, the U.S. Trustee said it warned BlockFi that it may be out of compliance. BlockFi said it would provide proof of compliance, which the U.S. Trustee said it had not by the time the FDIC seized control of SVB.

BlockFi filed for bankruptcy protection in November. It has creditors such as FTX US and the Securities and Exchange Commission.  

Madhu Unnikrishnan contributed reporting.

© 2023 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

The failure of California-based Silicon Valley Bank today leaves the crypto market with one fewer lending partner, adding further pressure on stablecoin issuer Circle to beef up its portfolio of bank partners. 

Silicon Valley Bank, which ranks many tech companies and startups among its clients, became the largest bank to fail since the 2008 financial crisis on Friday, and the FDIC seized control. Silicon Valley Bank’s collapse came shortly after crypto-friendly Silvergate said it was liquidating. 

That leaves Circle with two fewer banks to hold the cash tied to its USDC stablecoin. Circle is in the process of establishing new banking relationships, according to sources. The stablecoin issuer also banks with BNYMellon and Citizens Trust Bank. 

Circle did not respond to several requests for comment on the extent of its exposure to SVB.

Rival Tether, which said it was not exposed to Silicon Valley Bank,  also is expanding its own banking relationships, adding to an existing “resilient network of strong banks.” These relationships have been “in the works since a while, independently from recent events,” CTO Paolo Ardoino said. Tether said that it did not have any exposure to Silicon Valley Bank.

Paxos, another stablecoin issuer, also noted that it did not have exposure to Silicon Valley Bank.

Smaller firm’s fate

More established firms like Circle and Tether might be in a stronger banking position, even after the collapse Silvergate. Smaller crypto firms or companies looking to enter the industry may find it more difficult to find a bank to work with in this financial and regulatory environment.

“There is nothing really stopping a bank from banking a crypto company but your bank regulator is going to come look at your books more frequently — let’s say every six months instead of every 12, and that makes your life more difficult and drives up compliance costs,” said Meltem Demirors, CoinShares chief strategy officer. “So unless a crypto firm is a really big revenue generator, the juice isn’t worth the squeeze for many banks.”

© 2023 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

Crypto prices continued to trade down driven lower by the latest U.S. banking casualties and worsening market sentiment. 

Bitcoin was trading around $19,990, down 5% in the past 24 hours, according to TradingView data. The leading cryptocurrency by market cap and many of its peers experienced the worst week in trading since the collapse of FTX in November. Ether slid 6% to around $1,400. 

BTCUSD chart by TradingView

Altcoins fell across the board. Binance’s BNB slipped 2.8%, and Ripple’s XRP dropped 4.7%. Dogecoin was down 6.3%, and shiba inu fell 4.5%. 

Crypto stocks also were mostly down. Coinbase dropped 9.9% to about $52, MicroStrategy fell 9.3% to $191.40, and Block dropped 4.1% to just below $71. 

Macroeconomic conditions have weighed heavily on markets this week. Fed Chair Jerome Powell said interest rates could go higher than originally expected earlier in the week, adding the central bank was “prepared to increase the pace of rate hikes.”

With this in mind, U.S. jobs data for February became even more significant — the Fed noted a softening of the labor market might be required to stem inflation. 

© 2023 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

Silicon Valley Bank was closed by the California Department of Financial Protection and Innovation. The Federal Deposit Insurance Corporation was appointed as the receiver. The FDIC created the Deposit Insurance National Bank of Santa Clara to protect insured depositors. 

All insured deposits at Silicon Valley Bank, popular with start-ups and venture capitalists, were immediately transferred to DINB. Insured depositors will have access to their insured deposits by March 13, according to an FDIC announcement.

Silicon Valley Bank became the first FDIC-insured institution to fail this year, the previous being Almena State Bank, of Almena, Kansas, in 2020.

Trading in Silicon Valley Bank was halted shortly before 9 a.m. EST, but not before after shares plunged 63% in pre-market trading. Shares dropped 60% on Thursday.

The closure comes two days after La Jolla, California-based crypto-friendly bank Silvergate announced plans to wind down operations.

© 2023 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.