In less than a week, two of the banks that were most supportive of the cryptocurrency industry and the largest bank for tech entrepreneurs all failed. The federal government intervening to offer a safety net for depositors at two of the banks caused cryptocurrency prices to rise on Sunday night, but the situation also caused turbulence in the stablecoin market.
A major financier for the cryptocurrency sector named Silvergate Capital announced on Wednesday that it will be closing down and liquidating its bank. Major startup lender Silicon Valley Bank failed on Friday after depositors withdrew more than $42 billion in response to the bank’s disclosure on Wednesday that it needed to raise $2.25 billion to strengthen its balance sheet. Banking regulators seized Signature on Sunday night; it also had a significant crypto focus but was far bigger than Silvergate.
About half of all U.S. venture-backed startups maintained cash with Silicon Valley Bank, along with several digital asset companies and crypto-friendly venture capital funds. Signature and Silvergate were the two primary banks for cryptocurrency companies.
On Sunday, the federal government intervened to guarantee all deposits for SVB and Signature depositors. This move boosted confidence and led to a brief uptick in the price of cryptocurrencies. In the previous day, ether and bitcoin have both increased by almost 10%.
Nic Carter of Castle Island Ventures claims that the government’s readiness to support both banks indicates that it is once again pursuing a loose monetary policy rather than one that is tightening. This has historically been beneficial for cryptocurrencies and other speculative asset classes.
Nevertheless, the unpredictability once more exposed the weakness of stablecoins, a segment of the cryptocurrency ecosystem that investors can usually count on to retain a specific price. The value of a real-world object, such as a fiat currency like the US dollar or a commodity like gold, is what stablecoins are meant to be tied to. But, unfavourable financial circumstances could push them below their fixed value.
Not-so-stablecoins
Since TerraUSD’s demise in May of last year, many of crypto’s issues over the past year have their roots in the stablecoin industry. In the meanwhile, during the past several weeks, regulators have focused their attention on stablecoins. After pressure from New York regulators and the Securities and Exchange Commission on its issuer, Paxos, Binance’s dollar-pegged stablecoin, BUSD, experienced significant outflows.
The second-most liquid U.S. dollar-pegged stablecoin, USDC, lost its peg over the weekend, plummeting as low as 87 cents at one point on Saturday after its issuer, Circle, acknowledged having $3.3 billion banked with SVB. As a result, the sector’s confidence suffered once more. Circle has a reputation as one of the adults in the room in the ecosystem of digital assets because of its connections to and support from the traditional finance industry. It has long declared its intention to go public and raised $850 million from investors including BlackRock and Fidelity.
On Saturday, DAI, another well-liked dollar-pegged virtual currency that is backed in part by USDC, went as low as 90 cents. Conversions from USDC to dollars have been momentarily stopped on Coinbase and Binance.
Several traders started exchanging their USDC and DAI for tether, the largest stablecoin in the world with a market cap of more than $72 billion, on Saturday. Though tether’s business methods and the condition of its reserves have been questioned, the issuing company did not have any exposure to SVB, and it is currently trading above its $1 peg as traders seek out safer havens.
After Circle published a blog post on Sunday night stating that it will fill any gap utilizing company resources, the stablecoin market started to recover. Since then, the USDC and DAI have both turned back towards the dollar.
Carter tells that he anticipates USDC will trade at par now that it is obvious that SVB depositors will be made whole.
‘The two most bitcoin-friendly banks’
In the long run, bitcoin, the most valuable cryptocurrency in the world with a market value of $422 billion, may experience issues due to the closure of the crypto banking trinity.
Customers of cryptocurrencies saw real-time payment platforms like the Silvergate Exchange Network (SEN) and Signature’s Signet as essential services. Both companies offered fast settlement services that allowed business clients to make payments whenever they wanted, day or night, seven days a week.
Carter stated that “bitcoin liquidity and crypto liquidity generally will be slightly affected” since “Signet and SEN were crucial for firms to get fiat in over the weekend.” Carter also expressed hope that “customer banks” will step in to fill the hole left by SEN and Signet.
In a post on the social networking platform Damus, Mike Brock stated that these two financial institutions supported the majority of currency settlement for bitcoin deals between trading counterparties in the United States. At Block, a division that concentrates on cryptocurrencies and decentralized finance, Brock is the CEO of TBD.
Carter claims that even while the Fed’s intervention to protect SVB’s depositors would stop a greater bank run on Monday, it is nonetheless distressing to watch the three most crypto-friendly banks shut down in a matter of days.
For crypto companies, their alternatives are currently quite limited, and unless new banks enter the market, there won’t be enough liquidity.
Many in the sector are switching to Mercury and Axos, two other banks that serve startups, according to Mike Bucella, a longstanding investor and executive in the crypto business. Given that Signature Bank is closing, Circle has already made it known publicly that it is transferring its assets to BNY Mellon.
Crypto banking in North America is difficult in the short run, according to Bucella. The extended tail of challenger banks, though, could take up that slack.
