After USDC detached from $1 last week, many in the crypto industry are wondering if the collapse of Silicon Valley Bank will have a bigger impact on the stablecoin ecosystem.

The supposedly stable stablecoin USDC initially decoupled on Friday, falling to just 88 cents on Saturday due to uncertainty surrounding the $40 billion USDC empire, the second largest stablecoin by market cap. Circle, the issuer of USDC, shared that $3.3 billion, or about 8.2%, of its total USDC reserves were held with SVB. Circle later announced that reserve risk had been “removed” since the funds became available Monday morning.

USDC’s depeg over the weekend exposed a critical flaw with the existing fiat-backed stablecoin design, said Reserve co-founder and CEO Nevin Freeman.

“If one of the banks the stablecoin issuer relies on fails without a bailout, and the issuer is unable to fill the gap with its own capital or a new capital injection, that would either force a bank run on the stablecoin and force the latter to with nothing to redeem, otherwise the issuer would have to shut down and go out of business to avoid such a run,” Freeman told CoinTech+. “This is not the fault of the stablecoin issuers; they have no choice but to rely on fractional reserve banks in providing liquidity to their users.

Over the weekend, USDC’s price acted as a live prediction market for whether SVB depositors would be made healthy, Freeman said. Shortly after the Federal Deposit Insurance Corporation and the US Federal Reserve announced that depositors would be made healthy, the stablecoin rose from 97 cents to 99 cents, and it wasn’t until banks opened and actually operated that it recovered to $1, he noted .

SVB’s mess could become stablecoins’ problem by Jacquelyn Melinek, originally published on CoinTech