So much has happened in the past week that it may be useful to look at the totality of these events in relation to bitcoin.
The is opinion editor by Dillon Healy, institutional partnership in Bitcoin Magazine and Bitcoin 2023.
The biggest news of the past week was the collapse of the banking sector, especially crypto-friendly banks. On March 2, in its own SEC filing, Silvergate expressed concerns about its solvency and ability to continue operations. This, in my opinion, is undeniably the result of direct and/or indirect exposure to the continued contagion in the crypto industry created by the collapse of Luna, 3AC, and FTX. As expected, there are banks following from Silvergate partners to distance and withdraw assets.
Silvergate’s stock ($SI) immediately fell more than 50% on reports of clients moving elsewhere.
“Nowadays it is increasingly difficult for crypto companies to establish or maintain relationships with US banks,” said Ivan Kachkovski, FX and crypto strategist at UBS.
Speculation is rife about how the Silvergate unwind will affect stablecoins and other crypto service banks. Silvergate has become the main issuer of the second most popular stablecoin USDC.
Contagion concerns then moved to Signature Bank, another popular crypto service bank.
“Signature notes that it previously stated that from February 1, it will not support crypto exchange customers to buy and sell amounts of less than $100,000. Signature said in December that it will reduce its exposure to the crypto sector, although it will not eliminate it entirely.
On March 8, Silvergate officially announced that it was winding down its operations and liquidating its assets through a press release.
The official collapse of Silvergate meant that the contagion spread further and increased uncertainty and fear among banking customers and USDC users. On March 9 and 10, Silicon Valley Bank experienced a classic bank operation. Billions of withdrawals piled up from fractional reserve banks, many withdrawals from core clients, start-up companies.
SVB’s stock fell 60% and by the end of the day the regulator had closed the bank and the assets had changed hands to the FDIC. The SVB unwind was the second largest bank collapse in US history.
Confidence in banks is rising rapidly as most publicly traded companies collapse.
With SVB unwind happening attention once again turned to Circle’s USDC, the second largest stablecoin with a market capitalization of $43 billion, as it was reported that Circle has an undisclosed portion of $9.8 billion in cash reserves in the now collapsed Silicon Valley Bank.
During March 11, the USDC/USD peg started to break to $0.87.
At the end of the week fear continues to spread, thousands of start-ups banked in SVB will not have access to funds or payroll there. Signature Bank was also officially shut down by US regulators.
On Sunday, the Fed, along with the FDIC and the US Treasury, came out with a statement:
“Depositors will have access to all their money from Monday, March 13. None of the losses related to the resolution of Silicon Valley Bank will be borne by taxpayers.”
Amid all the contagion, there is a report of Signature Bank being specifically targeted by anti-crypto regulators. “I think part of what’s happening is that regulators want to send a very strong anti-crypto message,” said Signature Bank board member Barney Frank.
Obfuscated bailouts allow failed banks to lend against negative collateral values at par rather than at market value.
The week opened with a new government bank deposit backstop, and ongoing concerns about whether banks are guaranteeing counterparty risk to individuals and businesses. After several collapses in fractional reserve banking, bitcoin appears to be trading on fundamentals rather than speculation for the first time in a while.
The risks associated with fractional reserve banking combined with centralized monetary policy and volatile interest rates are on full display, while fully supported banking solutions apparently actively blocked by Fed.
The events of the past few weeks should educate people about the dangers of a centrally controlled economy that depends on credit and leverage. I strongly recommend that people interested in learning how Bitcoin works outside of this system attend Bitcoin 2023 in Miami on May 18-20, where the topic will be discussed in depth.
This is a guest post by Dillon Healy. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.