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(Bloomberg) -- The second-largest stablecoin in crypto fell from its intended $1 peg on Saturday, trading as low as 81.5 cents, hurt by the exposure of issuer Circle Internet Financial Ltd. to the collapsed Silicon Valley Bank.

USD Coin, or USDC, is a key plank of crypto markets and is supposed to hold a constant $1 value, fully backed by reserves of cash and short-dated Treasuries. But $3.3 billion of that roughly $40 billion stockpile is with Silicon Valley Bank, which has just become one of the largest US bank failures in recent history.

Regulators seized the bank on Friday and investors are awaiting more clarity on the return of deposits. In that vacuum, USDC fell below $1, trading at about 92 cents as of 9:02 a.m. in London on Saturday. Smaller stablecoins such as DAI and Pax Dollar also fell from their pegs, a sign of wider nervousness. 

The worries haven’t so far spread to top stablecoin Tether, which held at $1. Tether has previously faced scrutiny over its reserves. Wider crypto markets are having a painful week and were on the back foot Saturday: Bitcoin oscillated between gains and losses, while smaller tokens like Solana and Avalanche were in the red.

Circle’s Chief Strategy Officer Dante Disparte described the fall of Silicon Valley Bank as a “black swan failure” in the US financial system, saying in a tweet that without a federal rescue plan there would be “broader implications for business, banking and entrepreneurs.”

USDC has a circulating supply of about 41 billion tokens and a market value of roughly $37 billion, CoinGecko data shows. A net $2 billion of USDC was redeemed in the past 24 hours, according to blockchain research firm Nansen. Data compiled by Bloomberg indicated USDC traded as low as 81.5 cents.

Coinbase’s Step

Stablecoins like USDC are intended to hold a set value against another, highly liquid asset like the US dollar. They come in a variety of forms and some, like Circle’s, are underpinned by reserves of cash and bonds. Investors often park funds in stablecoins as they move between crypto trades.

As the selloff in USDC worsened, US-based crypto exchange Coinbase Global Inc. said it would be “temporarily pausing” the conversion of USDC into US dollars during the weekend, and would resume on Monday when banks open. 

The fall in USDC has had a knock-on effect on decentralized finance applications which let users trade, borrow and lend coins and which tend to rely heavily on trading pairs involving the stablecoin.

“Unless there’s a concrete bailout plan this weekend, I think markets will be ugly again next week,” said Teong Hng, chief executive officer at crypto investment firm Satori Research, about the failure of SVB. 

Crypto’s Woes

The crypto sector was already reeling from a prolonged rout that’s knocked $2 trillion off the value of digital assets since November 2021, precipitating a series of implosions such as the TerraUSD stablecoin, the Three Arrows Capital hedge fund and the FTX exchange.

The TerraUSD token — known as UST — tried to use a mix of algorithms and trader incentives involving a sister token, Luna, to hold its value. The $60 billion wipeout of that system intensified global regulatory scrutiny of stablecoins.

“I think the market ‘panic priced’ USDC like it priced USDT around the Luna collapse,” said Haohan Xu, chief executive officer of Apifiny, an institutional trading platform. “It’s driven by Circle’s exposure at SVB plus Coinbase closing off its USDC convert function.” 

Trying to Reassure

Crypto firms including Binance and Tether on Friday used Twitter to try to reassure their customers about any risks posed by the failed bank.

Changpeng Zhao, chief executive officer at Binance, the largest digital-asset exchange, tweeted that the firm doesn’t have exposure and its funds are safe. 

Paxos Trust Co., issuer of Pax Dollar, and crypto exchange Gemini said they have no relationship with the bank, according to statements on their official Twitter accounts. Tether’s Chief Technology Officer Paolo Ardoino said in a tweet that the largest stablecoin doesn’t have exposure to SVB.

By contrast, bankrupt crypto lender BlockFi has about $227 million in an account at the failed bank, according to a court filing.

--With assistance from David Pan.

(Updates market prices in the fourth paragraph. An earlier version of this story corrected the TerraUSD acronym in the 12th paragraph to UST.)