A man walks into Signature Bank in New York City on March 12, 2023.
Reuters
The two friendliest banks in the crypto sector and the biggest bank for tech startups all failed in less than a week. When cryptocurrency prices rallied Sunday night after the federal government stepped in to provide a backstop for depositors in two of the banks, the event triggered instability in the stablecoin market.
Silvergate Capital, the central lender to the crypto industry, said on Wednesday that it will wind down its operations and free the bank. Silicon Valley Bank, the main lender to startups, collapsed on Friday after depositors withdrew more than $42 billion after the statement on Wednesday that the bank needed to raise $2.25 billion to shore up the balance sheet. Mark, which also has a strong crypto focus but is bigger than Silvergate, was seized on Sunday evening by banking regulators.
Signature and Silvergate are the two main banks for crypto companies, and nearly half of all US venture-backed startups keep their cash with Silicon Valley Bank, including crypto-friendly venture capital funds and some digital asset companies.
The federal government stepped in on Sunday to guarantee all deposits for SVB and Signature depositors, boosting confidence and causing a small rally in the crypto market. both sides bitcoin and ether almost 10% higher in the last 24 hours.
According to Nic Carter of Castle Island Ventures, the government’s willingness to backstop the two banks means that it is back in the mode of providing liquidity, instead of tightening, and loose monetary policy has historically proven to be a boon for cryptocurrencies and other speculative asset classes.
But that instability once again shows the vulnerability of stablecoins, a subset of the crypto ecosystem investors can usually rely on to maintain a set price. Stablecoins are supposed to be pegged to real-world asset values, such as fiat currencies like the US dollar or commodities like gold. But unusual financial circumstances may cause them to fall below their pegged value.
Not-so-stablecoins
Many of the crypto problems of the past year have come from the stablecoin sector, starting with TerraUSD collapsed last May. Meanwhile, regulators have been cracking down on stablecoins in recent weeks. Binance’s dollar-pegged stablecoin, BUSD, saw a massive outflow after New York regulators and the Securities and Exchange Commission applied pressure on the issuer, Paxos.
Over the weekend, confidence in the sector again took a hit as USDC – the most liquid stablecoin against the US dollar – lost its peg, falling below 87 cents at one point on Friday after its issuer, Circle, admitted it had $3.3 billion. banked with SVB. In the digital asset ecosystem, Circle has long been considered one of the adults in the room, with close ties and support from the traditional financial world. It raised $850 million from investors like BlackRock and Fidelity and has long said it plans to go public.
DAI, another popular virtual currency backed by the USDC, traded as high as 90 cents on Saturday. Coinbase and Binance temporarily pause USDC-to-dollar conversions.
Dino Saturday, some traders are starting to change USDC and DAI for tether, the world’s largest stablecoin with a market value of over $72 billion. Companies that issue Tether have no exposure to SVB and are currently trading above the $1 peg as traders flock to safer pastures, although tether’s business practices have been questioned, as has the reserve situation.
The stablecoin market began to rebound on Sunday afternoon after Circle released a blog post saying it would “cover any shortfall using company resources.” Both USDC and DAI have since returned to the dollar peg.
Now that it is clear that SVB depositors will be made whole, Carter told CNBC that he expects the USDC to trade at par.
‘The two most bitcoin-friendly banks’
In the long term, the shutdown of the crypto banking trifecta may present problems for bitcointhe largest cryptocurrency in the world, with a market value of $422 billion.
Silvergate Exchange Network (SEN) and Signature’s Signet are real-time payment platforms that crypto customers consider their core offerings. Both allow commercial clients to make payments 24 hours a day, seven days a week, through an instant settlement service.
“Bitcoin liquidity and overall crypto liquidity will be slightly damaged because Signet and SEN are key for companies to get fiat over the weekend,” said Carter, who added that he hopes customer banks will fill the void left by SEN. and Signets.
“These are the two most bitcoin-friendly banks, supporting the largest share of fiat settlements for bitcoin trades between trading partners in the US,” Mike Brock wrote in a post on the Damus social media app. Brock is TBD CEO at Block, a unit focused on cryptocurrency and decentralized finance.
Although Carter thinks the Fed will reassure SVB depositors that it will prevent the bigger bank on Monday, he said he is still unhappy to see the three biggest crypto-friendly banks taken offline in a matter of days.
“There are few options now for crypto companies and the industry will be strapped for liquidity until new banks come in,” Carter said.
Mike Bucella, a longtime investor and executive in the crypto space, said many in the industry are moving to Mercury and Axos, two other banks that cater to startups. Meanwhile, Circle has publicly said it is moving its assets to BNY Mellon now that Signature’s bank is closing.
“In short, crypto banking in North America is a tough place,” Bucella said. “But there is a long tail of challenger banks that can pick up their slack.”
