There is one more aspect, and it is of an ideological nature. Decentralized assets like Bitcoin allow holders to access and transfer their funds unrestrictedly, while the programmed predictability of their issuance makes it easy to plan ahead. The recent banks collapse once again showed that none of these two qualities can be attributed to fiat money, and Bitcoin is having its moment of glory.
Why did these banks fail?
Silvergate, which announced its liquidation last week, was a crypto-focused bank with over $13 billion assets reported last quarter.
The main reason it failed was an excessive concentration of crypto clients, whose massive cash withdrawals caused by the bear market have led to insufficient capitalization.
Silicon Valley Bank was America’s 16th-biggest bank ($212 billion assets) and the go-to banking destination for tech VCs and startups. In business for 40 years, its collapse took only two days:
- On Wednesday, the bank announced that it needed to raise $2.25 billion to shore up its balance sheet,
- By the end of Thursday, its panicking customers withdrew $42 billion of deposits,
- On Friday, the FDIC shut down the bank and put it into receivership.
The SVB is already called the biggest bank failure since 2008.
The main reason it failed was investing over a third of its clients’ money ($82 billion) into 10+ years mortgage-backed securities in 2021. As the Fed was raising rates throughout 2022, the value of these should-be-safe products has plummeted, as the standard bonds now offer an approximately x2.5 higher yield.
Paper losses have transformed into real ones when clients started to withdraw money.
Signature bank ($110 billion assets), facing $10 billion deposit withdrawals caused by the SVB panic, was pre-emptively closed by the regulators, who cited “systemic risks”.
USDC de-pegging
Several big crypto companies had funds locked in the failed banks, including major VCs like a16z, Paradigm, and Pantera, as well as BlockFi, currently in the middle of bankruptcy proceedings.
However, probably the most important announcement for the crypto space came from Circle. The American issuer of $USDC stablecoin confirmed that $3.3 billion of the ~$40 billion of USDC cash reserves remain at SVB.
Panicking $USDC holders ran to exchange or redeem the stablecoin, which lost its peg and at one moment fell to $0.87. Pausing redemptions for a weekend probably saved the stablecoin from falling even further, and by Monday, reassured by the regulators’ implication, it returned to $1.
Still, $USDC market cap has decreased from $43 billion to $38 billion, further widening the gap with Tether, its main competitor.
Regulators stepping in
On Sunday, Treasury, Federal Reserve, and FDIC released a joint statement ensuring that FDIC will complete its resolution of SVB and Signature “in a manner that fully protects all depositors”.
The Fed Board announced it will “make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors”.
This would mean that the Fed would have to halt its hawkish policy and start creating money to fund an emergency lending program – the situation that some have already dubbed the “stealth QE” and which is likely to invigorate the markets.
Impact on crypto
Circle was of systemic importance to the crypto ecosystem, and its returning its peg is good news.
However, another long-term risk for the crypto industry might be its failing connection with the banking system. Three crypto-friendly banks closing their doors is painful for the companies that now need to find another banking partner and alarming for the future banking regulations concerning crypto companies.
There’s an upside too
The famous Bitcoiners’ adage “not your keys, not your money” has once again come to light, as people witnessed the flaws of the financial system – which Bitcoin promises to fix. An impressive 33% $BTC rally following the events marked a new hope for the crypto markets.
Written by D.Center
