The crypto industry's medium and long-term problems got far worse on Sunday.
Editor's Note: There's Good News... and Bad News
Connor Sephton writes...
Let's start on a positive note. Silicon Valley Bank's customers are being made whole today — at no cost to taxpayers.
That's especially good news for Circle, which issues USD Coin. Following news that the company had $3.3 billion tied up in SVB, USDC took a nosedive — violently depegging from the dollar and hitting an all-time low of $0.8774.
You could argue this was a gross overreaction, as this amounts to less than 10% of the funds that Circle holds in reserve. First off, not all of the funds would have been lost. And second, the shortfall could easily have been recovered by interest… or a corporate injection.
USDC is trading at $0.9993 at the time I'm writing this — and has practically recaptured its all-important peg to the dollar. This stablecoin has dodged an almighty bullet — and given its strong track record with auditing, there shouldn't be all that much of a long-term impact on consumer confidence.
But there's a much, much bigger elephant in the room that we need to talk about.
Silvergate, Silicon Valley Bank and Signature have been crushed in the past week. All three were crypto-friendly financial institutions. They helped exchanges offer fiat on-ramps so local currency could be converted into digital assets. And they facilitated real-time, 24/7 payments — resulting in liquidity that's helped the market thrive.
Their demise leaves the crypto sector increasingly cut off from traditional banks, with few other institutions willing to take their place. Many businesses are now scrambling for alternatives. OKCoin is among those that can no longer process USD deposits on behalf of its customers — albeit temporarily — and it won't be the only one.
Even before this crisis, a crackdown by the SEC meant the U.S. was an unwelcoming place for crypto firms. And as Bloomberg notes, several companies are now looking toward Switzerland and Asia for banking partners. Crypto was meant to bank the unbanked, and now, it's the one being de-banked.
Yes, USDC has dodged a bullet. Yes, the crypto markets have staged a relief rally now the worst appears to be over at SVB. But this weekend's events have already created much bigger headaches for the industry — and problems that could last for months.
Silicon Valley Bank customers have full access to their funds from this morning — following a panicked weekend. It comes days after SVB was closed by California's Department of Financial Protection and Innovation — with FDIC appointed as the receiver. All deposits have been transferred to a "bridge bank." Normal business hours are now in force — with debit cards and ATM withdrawals fully operational. A statement said: "All depositors of the institution will be made whole. No losses associated with the resolution of Silicon Valley Bank will be borne by taxpayers. Shareholders and certain unsecured debt holders will not be protected. Senior management has also been removed."
The weekend's chaos saw USDC reach a new all-time low of $0.8774, with Bitcoin also trading at its cheapest price in two months. But as the storm clouds surrounding SVB began to clear, digital assets have enjoyed something of a rebound. USD Coin is now once again trading at normal levels — with Bitcoin rallying 13% over the past 24 hours and breaking through $23,000. There's also a sea of green among altcoins, with Ether, BNB and Cardano all posting double-digit gains. Unfortunately though, there are signs that other financial institutions — such as First Republic — could be next in line for a bank run. USDC's bounceback will be especially good news for those who regarded the depeg as an arbitrage opportunity.
SVB was the 16th-largest bank in America — and without question, it was the largest failure of a U.S. financial institution since the 2008 financial crisis. And like many other banks, it had a presence internationally, including an arm in Britain. Silicon Valley Bank U.K. has now been snapped up for the princely sum of £1 — about $1.21 — by the British arm of HSBC. Chancellor Jeremy Hunt — the country's finance minister — also stressed that deposits would be protected and no bailout from taxpayers would be necessary. The drama also affected a small Indian bank called SVC. On social media, panicked concerns about its financial health were raised… all because it had a slightly similar name to SVB.
The crypto industry's medium and long-term problems got far worse on Sunday. New York financial regulators seized crypto-focused Signature Bank to prevent a Monday morning run. When combined with Silvergate and SVB, this means the sector's three main banking partners are suddenly gone. And gone with them are the Silvergate Exchange Network and Signature's SigNet, both real-time payments services that let firms move funds on crypto's 24/7 schedule, rather than relying on the traditional banking networks that operate basically on bankers hours — including not over the weekend. The race is now on to find alternatives, but this coincides with an increasingly aggressive clampdown from regulators.
As you might expect, there's growing exhaustion on Crypto Twitter as the blows keep coming. But USDC's rollercoaster ride is incomparable to UST's implosion. Entrepreneur Andrew Kang explained that the implications from Circle's exposure to SVB are both negative and positive. Supply could drop as holders diversify risk — and DeFi and CeFi liquidity could take a hit. But on the other hand, surviving SVB's failure could help prove USDC's resilience — and compel Circle to come up with backup plans in case such emergencies happen in the future. "At least with Tether we’ve seen that what doesn’t kill you makes you stronger," he wrote. But all of this chaos won't help rehabilitate crypto's image, which has already taken quite a battering.