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One week ago, the crypto space was worrying about Silvergate, which indeed announced its liquidation last Wednesday.
Silvergate’s failure has since been eclipsed by a similar event unfolding on a much bigger scale: the Silicon Valley Bank, known for its mostly tech and startup clientele (including crypto firms), has collapsed too💥
But that’s not all 😱 Today, we have woken up to the news that Signature bank, another crypto-friendly US institution, has been closed by the regulators, citing “systemic risks”.
Without regulators’ intervention, these banks’ collapses could be devastating for the crypto space, as many companies risk having their funds lost or blocked for a long time. What’s more, among these companies some are of systemic importance to the whole crypto ecosystem – like Circle 🔵, the issuer of $USDC stablecoin, which de-pegged over the weekend.
However, SVB failure could also be beneficial to crypto, at least in that it reminded us of why cryptocurrencies were created in the first place – to bypass any intermediary that can stand between you and your money.
Crypto markets’ price action has been interesting to observe in these turbulent times: $BTC dropped 📉 -16% to the news about Silvergate and then – SVB , but has since recovered and even surpassed📈, enthusiastically gaining +25% after a joint statement by Treasury, Fed, and FDIC.
So let’s take a closer look at what happened to SVB, how this could affect the crypto space, what was the regulators’ response, and finally – if any good can come out of this situation (spoiler alert – it can 😉)
Silicon Valley Bank is America’s top-20 bank, with $212 billion assets reported last quarter. In business for 40 years, its spectacular collapse 🌠 took only two days :
➡️ last Wednesday, the bank announced that it needed to raise $2.25 billion to shore up its balance sheet,
➡️ by the end of Thursday, its panicking customers withdrew $42 billion (!) of deposits,
➡️ on Friday, the FDIC shut down the bank and put it into receivership, i.e. setting up a system helping creditors to recover their funds. Receivership does not mean bankruptcy – SVB still has funds – but they may take a lot of time to be unblocked, and not fully.
The SVB is already called the biggest bank failure since 2008, and the bank’s main fault was investing too much of its clients’ money (over $80 billion) into long-term (10+ years) mortgage-backed securities in 2021. As the Fed was raising rates throughout 2022, the value of these should-be-safe products has plummeted, as the standard bonds now offer a x2.5 higher yield.
The rest is history: SVB became yet another bank that could not ensure enough liquidity facing a bank run 🏃🏃🏃
All three collapsed banks were favored by crypto VCs and other crypto companies, which now risk losing (or having blocked) their deposits exceeding $250k, the amount guaranteed by the FDIC insurance.
Among these companies, the most important for the crypto space is probably the stablecoin issuer Circle, which confirmed that $3.3 billion of the ~$40 billion of USDC cash reserves remain at SVB.
Following this announcement, the markets panicked and $USDC lost its peg: sliding as low as $0.87 during the weekend, and recovering to $1 on Monday.
Circle stopped USDC-USD conversions “for the weekend, while banks are closed’, as did Coinbase, while Binance halted USDC-BUSD conversions without a precise timeframe.
$USDC is the world’s second-biggest stablecoin, and its de-pegging can affect the many services that use it, like decentralized stablecoin $DAI, which has $USDC in its reserves, or partially collateralized/partially algorithmic stablecoin $FRAX (both de-pegged following $USDC).
It might be too early to bury $USDC, though. As precised by Circle, cash blocked at SVB represents only 7% of its total reserves. $USDC is currently collateralized 77% with US Treasury Bills (with a three-month or less maturation period), and 16% with cash held “at a variety of institutions” other than SVB.
In the meantime, Circle problems mark another milestone in the stablecoin wars, giving more advantage to Tether, the issuer of the #1 stablecoin $USDT. Tether confirmed it didn’t have any exposure neither to Silvergate nor to SVB.
Some other crypto firms that dodged the SVB bullet include Solana, Polygon, Kucoin, and Blur.
Among the less lucky ones we can name:
· a16z (the biggest crypto VC): exposed to an estimated $2.85 billion
· Paradigm (crypto VC): estimated $1.72 billion
· Pantera (crypto VCs): estimated $560 million
· BlockFi (CeFi, filed for bankruptcy last November): $227 million
· Avalanche Foundation (developing the Avalanche blockchain ecosystem): $1.6 million
· Proof (creator of Moonbirds NFT collection): undisclosed amount
· Yuga Labs (creator of BAYC NFT collection): “super limited exposure”
One of the biggest risks for the crypto industry might be its broken connection with the banking system 🏦
Three crypto-friendly banks closing their doors is a serious obstacle that many crypto firms will have to overcome, and doing so might not be obvious.
As panic spread around the world, US regulators stepped in and released a statement on Sunday, ensuring that FDIC will complete its resolution of SVB and Signature “in a manner that fully protects all depositors”.
What’s more, the Fed Board announced it will “make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors”.
For the moment, one can speculate about the nature of this “additional funding”, but we would bet that the Fed is going to use its favorite tool: create more dollars and buy long-term securities.
So let’s recap:
➡️ in 2020-21, the Fed prints over $4 trillion and injects it into the economy, while interest rates are close to 0,
➡️ institutions invest this new money into long-term securities with low yields,
➡️ new money supply creates massive inflation, and in 2022-23 the Fed starts to raise rates,
➡️ institutions suffer paper losses on their securities, which turn into real losses when clients start to massively withdraw deposits,
➡️ to save the financial sector from a generalized bank run, the Fed starts printing money.
We have come full circle, and the question that many can now ask is – was it worth it? 😅
The situation is dire, and we do not know yet how far the contagion will spread, both in crypto and the overall tech/financial sectors.
👉 However, the banks’ failure did the crypto industry one big favor: it reminded us that our money in the bank is never really ours.
In 2009, the first Bitcoin transaction was registered on the first blockchain, carrying The Time’s cover page title “Chancellor on Brink of Second Bailout for Banks”. Now that the US government is about to step in to save its banks, history repeats itself… but unlike 2009, Bitcoin is not an obscure cypherpunk dream anymore, it’s a viable independent alternative to banks and fiat money, accessible to everyone, everywhere.
🔑 Not your keys, not your money 🔑
👉 Also, the banks’ collapse has once again shown how irresponsibly Central Banks play with people’s money. Fiat money emission is controlled by a handful of people who take arbitrary decisions – which are not always in the interests of the majority of fiat holders.
Bitcoin emission, on the other hand, is predictable and invariable.
👉 Another consequence that the SVB collapse could have is pushing the Fed to not raise the interest rates as much as they could have wanted to.
Fed’s Chair Jerome Powell is already accused by some senators of being too hawkish, but this did not stop him from saying recently that he would consider further raising interest rates by 0.5 points (instead of the anticipated 0.25) to cool down the economy. The SVB collapse, triggered by the interest rates increase, might change his mind, and a lower interest rates hike (or even no hike) could be stimulating for all the markets, including crypto.