Welcome to The Node. This is Daniel Kuhn and Prachi Vashisht, here to take you through the latest in crypto news and why it matters. In today’s newsletter:
A prominent tech industry bank, Silicon Valley Bank (SVB), was shut down and put into Federal Deposit Insurance Corporation (FDIC) receivership on Friday, causing calamity in crypto markets and risks of contagion across the wider economy. Federal and state financial regulators said Monday all depositors will be made whole and will soon have access to their funds. Across the pond, HSBC announced its U.K. subsidiary will acquire Silicon Valley Bank U.K. (SVB U.K.) for one pound. A number of crypto-focused firms have lost access to their banking services, raising questions about payroll and continued operations during SVB’s bankruptcy process. Crypto-focused venture firms Blockchain Capital, Dragonfly Capital and Pantera Capital are reportedly impacted, and at least $902 million worth of USDC stablecoins have been withdrawn from centralized exchanges. Finally, the always-astute International Monetary Fund warned G-20 nations that the widespread adoption of crypto assets could result in banks losing deposits and wider credit issues.
Tokens Depeg
On Friday, USDC lost its dollar peg and fell as low as about 87 cents after news the stablecoin’s issuer, Circle, held a portion of USDC’s backing capital at SVB. Circle later clarified that SVB was just one of six banks used to hold the 26% of USDC reserves held specifically in cash, and USDC regained its peg. Bitcoin and bitcoin mining stocks traded slightly higher on the volatility, while MakerDAO’s DAI stablecoin largely tracked USDC’s fall and rise – dropping as low as 88 cents. Crypto exchange Binance, meanwhile, said it will convert $1 billion worth of its Binance USD stablecoin to BTC, ETH and other tokens to support the market as part of the Industry Recovery Initiative. That comes as U.S.-based exchange Coinbase suspends BUSD trading. Finally, trueUSD stablecoin issuer Techteryx said Monday that minting and redemption would be paused for users working with another distressed crypto-friendly bank, Signature Bank. In a later announcement, Singapore-based Techteryx said USD funds held at Signature are now fully backstopped by the Federal Reserve – though it’s hardly the only crypto firm impacted by Signature’s collapse.
The Cryptoverse
Euler Finance, a DeFi lending protocol, suffered a flash loan attack resulting in a loss of nearly $200 million worth of crypto. Meanwhile, dYdX passed a governance vote to reduce the derivative platform’s trading rewards by 45% – shooting its token up 29.89%. In other news, in addition to soon widely regulating cryptocurrencies, European politicians are considering creating a blockchain. Dubbed Europeum, the European Union’s chain could record property ownership, professional qualifications and respect privacy, said Belgium’s Digital Minister Mathieu Miche in a CoinDesk interview. And, to end on a positive note, Babel’s ex-CEO Flex Yang has created a new stablecoin called HOPE.
All these banks serviced some crypto clients. Some serviced more than others. Silvergate, in particular, banked several crypto exchanges and operated a 24/7 instant settlement network among Silvergate clients. The collapse of FTX weighed on Silvergate, and a scathing letter sent by U.S. Senator Elizabeth Warren (D-Mass.) to the bank’s executives late last year partially weakened public perception of the bank. The Biden administration also voiced concerns.
So Silvergate was run into the ground by a classic bank run that was at least partially encouraged by the U.S. government and not because of crypto (even if Senator Warren maintains it was). Especially when you consider that, in the end, Silvergate’s liquidation was voluntary and its plan includes a “full repayment of all deposits.”
Adding more kindling to the SVB fire – Reuters reported over the weekend that credit rating agency Moody’s was preparing to downgrade SVB’s credit rating, which potentially drove SVB to manage risk like this. On the downgrade news, SVB reportedly looked to Goldman Sachs for advice.
SVB subsequently sold $20 billion of bonds over a weekend, which generated a loss, and then aimed to fill that hole by raising equity capital. That equity raise failed and now SVB no longer exists. (This is starting to smell like 2007, isn’t it?)
Do note, though, that SVB is more dependent on Silicon Valley startups than it is on crypto companies.
Now, on Sunday, we had Signature shut down by state regulators. Signature is viewed as another crypto-friendly bank as Silvergate was. We’ve seen Barney Frank – yes, the Frank in Dodd-Frank – come out and say that clients may have overestimated Signature’s exposure to crypto. Frank knows this because, and I cannot believe this is true, he is a board member at Signature.
Frank also adds that Signature could have remained a going concern. Obviously regulators disagreed after customers withdrew more than $10 billion of deposits on Friday and Signature was taken over by the FDIC on Sunday.
Setting aside Silvergate for a moment because, let’s face it, it’s far less of a systemic risk to the broader banking system than SVB and Signature are (it is much smaller and it didn’t get a government backstop), there is a very interesting thing that ties SVB and Signature together: Media outlets and general outcry blames crypto for these bank failures.
Each of these failures is the result of poor risk management of customer deposits and a subsequent bank run. Taking one step back, suggesting that a single asset class, whose companies have issues getting banking services in the first place, would be able to take down the banking system on its own is patently absurd. What is this? Real estate?
Crypto has a banking problem, but banking doesn’t have a crypto problem.
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