ANALYSIS: USDC Dodges a Bullet, But Crypto Industry Now Has New Problems
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ANALYSIS: USDC Dodges a Bullet, But Crypto Industry Now Has New Problems

5 Minuten
6 months ago

The financial turmoil that killed Silvergate Bank, Silicon Valley Bank and Signature Bank will cast a long shadow on crypto's development.

ANALYSIS: USDC Dodges a Bullet, But Crypto Industry Now Has New Problems


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Three major banks with deep ties to crypto may have collapsed this weekend, but Circle's USDC stablecoin seems to have survived a potentially existential crisis of its own.

The No. 2 stablecoin lost its peg on Saturday dropping to $0.8774 in the wake of news that it had $3.3 billion trapped in the collapse of Silicon Valley Bank a day earlier.

By Sunday night it had risen as high as $0.9971, approaching its full dollar peg, although in the first few hours of Monday morning it fell back to $0.9909, suggesting ongoing uncertainty. And the importance of the U.S. markets response Monday morning.

A couple of things had happened, most notably the U.S. Treasury Department, Federal Reserve and Federal Deposit Insurance Corporation (FDIC) announced that they would use emergency powers to ensure that all depositors were made whole, rather than just protected up to the FDIC's standard $250,000. The price of USDC spiked practically in real time.

Nor was it a bailout — the bank's shareholders and executives have been wiped out — but that got drowned out in soundbites on Friday and Saturday about not "bailing out" banks.

"This is the sentence that needs to be seen by everyone," said Cinneamhain Ventures Managing Partner Adam Cochran on Twitter. "American bank deposits will be made whole and you do not need to worry." He added:

"The 'no bailout' line from Yellen means bank execs and investors aren't getting a bailout. But depositors *are*. This is honestly the most incompetent messaging I've ever seen on something like this."

Beyond that, he noted, it turned out that Circle had initiated a withdrawal wire transfer on Thursday, before SVB was placed in FDIC receivership on Friday morning, meaning it will likely be honored when banks reopen Monday.

Either way, Circle's $3.3 billion is undeniably safe, even to the panic-prone who feared that somehow the freezing of the funds meant that Circle would not be able to redeem its tokens, despite having another $40 billion in highly liquid short-term Treasury bonds and cash in other banks. Besides which, Circle had said it would make up any shortfall out of its corporate funds.

Context Matters

What SVB had to a large extent was bad timing. On March 8, crypto-focused bank Silvergate announced that it was winding down operations after an SEC filing a few days earlier warning that it might not be able to continue as a going concern became a self-fulfilling prophecy.

SVB had not been robbed, like Sam Bankman-Fried's FTX, or seen its assets devalue to nothing like the algorithmic stablecoin TerraUSD, which collapsed with its LUNA sister token in a $60 billion failure in May. But both of those cases, and the string of crypto lender bankruptcies between them, were fresh in everyone's minds.

Even though SVB had only a few crypto clients, the failure of Silvergate was even fresher, and the bigger bank just got caught in a panic. What it was doing was selling securities and shares to shore up its finances after a downturn in the startup industry — its primary clients — caused big outflows. But then big venture investors started warning portfolio companies to pull their money out, a run started, and SVB didn't have the liquidity to meet withdrawal demands.

Bigger Problems

As bad as a real run on USDC would be, the crypto industry's medium and long-term problems got far worse on Sunday, when New York financial regulators seized crypto-focused Signature Bank to prevent a Monday morning run. That was just four days after the other main crypto-friendly bank, Silvergate, announced it was shutting its doors.

At a time when regulators have been pressuring mainstream banks to avoid working with crypto clients — citing the fear of a crisis in digital assets spreading "systemic risk" into mainstream financial markets — the industry's two main bank partners are suddenly gone.

And gone with them are the Silvergate Exchange Network (SEN) and Signature's SigNet, both real-time payments services that let crypto 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.

"USDC liquidity operations will resume as normal when banks open on Monday morning in the United States," Circle CEO Jeremy Allaire said Sunday. "As a practical matter, our teams are well prepared to handle significant volume, built on the strong liquidity and reserve assets."

However, Allaire also said:

"With the closure of Signature Bank announced tonight, we will not be able to process minting and redemption through SigNet, we will be relying on settlements through BNY Mellon. Additionally, we will be bringing on a new transaction banking partner with automated minting and redemption potentially as soon as tomorrow."

Still, Circle has very well-audited reserves and a history of regulatory compliance generally matched by Coinbase, its Nasdaq-listed partner in USDC.

With the Securities and Exchange Commission making a big push to have virtually all cryptocurrencies labeled securities and the three main banking regulators making their desire to see banks stay far away from crypto very clear, many companies are going to find the going getting tougher.

Political Dynamite

Worse, the previously theoretical fear of a crypto contagion mutating into systemic risk is now a reality — the provisions used to fund the depositor-only bailout of SVB and Signature beyond the $250,000 FDIC limit are specifically for that purpose.

The need to prevent crypto from becoming a systemic risk is at the core of pretty much every regulatory recommendation by government agencies, elected officials and international financial organizations like the very crypto-skeptical Bank for International Settlements.

President Joe Biden's 2022 executive order mandating government agencies come up with a regulatory regime for cryptocurrencies was just one of them.

In a release with the order, the White House said its first goal was to "protect U.S. consumers, investors, and businesses" while encouraging economic growth. This included, it said, ensuring "sufficient oversight and safeguard against any systemic financial risks posed by digital assets."

Allaire's favorite solution, he said Sunday, is the Payment Stablecoin Act currently before Congress. It would, he said, "enshrine in law a regime where stablecoin funds would be held with cash at the Fed and short-term T-Bills" rather than at commercial banks that can fail. He added:

"We need this law now more than ever if we want a truly safe financial system."
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