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:
Inflation in the U.S. dropped to 0.4% from 0.5% in January, matching Bureau of Labor Statistics economists’ estimates, and likely contributing to bitcoin prices hitting a nine-month high of $25,484. In other news, banks including HSBC, Deutsche Bank and Bridge Bank are reportedly interested in working with crypto firms, according to internal Digital Currency Group communications reviewed by CoinDesk. DCG owns CoinDesk, and was one of many crypto companies affected by the closures of Signature and Silicon Valley Bank. Speaking of: Signature’s real-time settlement platform Signet is still operating despite being taken over by regulators. A person familiar with the matter said the SEN-like system will be managed by the newly established Signature Bridge Bank. Elsewhere, U.K.’s NatWest has limited daily crypto payments to 1,000 pounds ($1,218) per day and 5,000 pounds ($6,090) over a 30-day period. This comes as Binance said it will suspend its British pound services, reportedly impacting less than 1% users as the exchange looks for alternative solutions.
New Direction
Meta Platforms is winding down NFTs on Instagram less than a year after launch. The Facebook parent company will focus on other ways to support creators and businesses, tweeted Meta head of commerce and financial services Stephane Kasriel. Elsewhere, Dogecoin developers have finally patched a bug found last year. Blockchain security company Halborn said the issue still affects at least 280 other blockchains, including Litecoin and Zcash, and could potentially expose over $25 billion worth of tokens to security risks. Meanwhile, Web3 domain provider Unstoppable Domains has teamed up with Polygon Labs to roll out .polygon domain names. The tool is reportedly usable on some 750 decentralized applications, games and metaverses on the Polygon network at launch.
Consensus?
The European Parliament voted in favor of new data controls requiring smart contracts to include a “kill switch.” Critics have said the bill alters the fundamental nature of immutable, automated blockchains and it’s unclear how it could be implemented. In India, a Web3 event on Saturday allowed officials from the government and private sector to hash out potential regulations as the country looks to chart out rules as the current G-20 president. Finally, Coinbase argued it does not list securities, but would if it was given clear guidance from the U.S. Securities and Exchange Commission, in a “friend of the court” brief filed on behalf of a former employee who is facing insider trading charges.
The Takeaway: Banks or Bitcoin?
Three banks have failed in less than a week. U.S. government officials have stepped up to backstop losses, in a bid to prevent further panic. There are genuine concerns about whether that was the right move – effectively bailing out two poorly run institutions facing highly irregular problems and letting the third collapse – as well as the risk that more banks will fail.
So should you take your money out of your bank and keep it safe under the mattress or in bitcoin? The answer is, if you’re anything like me, whatever money you have in a checking account is insured by the Federal Deposit Insurance Corp. (FDIC) up to $250,000. So, no, it’s improbable that JPMorgan Chase will rug you.
Still, many are moving their money into crypto, like Tatiana Koffman, who described the move Monday in CoinDesk as an act of protest. Putting aside stablecoins, crypto is volatile, making these assets less than ideal currencies if you want to preserve your wealth. But they offer “root ownership” – meaning no one can make a run for your deposits.
Bitcoin, as many have already said, was born out of an earlier banking crisis. The blockchain’s very first block contained a message about bailouts. It was designed to disintermediate third parties from internet money by making people responsible for their own keys, in contrast to the highly intertwined private banking sector and public sector.
President Joe Biden has said U.S. taxpayers will not foot the bill for the bailout, and that unlike in 2008 the architects of this financial crash will not benefit. There are enough responsible actors here to play the blame game, but if you’re like Tatiana the issue is The System itself.
Senior management of Silicon Valley Bank sold millions of dollars’ worth of shares in the leadup to the crash. That is seemingly the only risk management they performed. In 2015, SVB Chief Executive Greg Becker said institutions like SVB did “not present systemic risks” while testifying before Congress over plans to deregulate banking that were implemented in 2018.
SVB essentially took a bet that interest rates would stay near zero forever. Over the past couple of years, it took in deposits from a tech industry that was booming, in part, due to historically low rates that made venture capital financing worth the risk for many investors. In an effort to juice as much yield as possible from those deposits, SVB put a majority of its money into long-term, fixed-rate interest investments.
The Federal Reserve, as my colleague David Z. Morris wrote, essentially created the foundation for a tech hype cycle through financial engineering to stimulate the economy, and then threw the frying pan into ice water when things got too hot. The recent interest rate rises were not necessarily unpredictable, but the Fed’s inconsistent messaging – saying rate hikes were unthinkable until they weren’t – did not help the situation.
Venture capitalists like Peter Thiel helped accelerate SVB’s outsized growth, and its quickened collapse. Thiel is reportedly a believer in Girardian mimicry, which explains why groups of humans make predictable if irrational decisions and our relentless pursuit of scapegoats. Tech leaders have said SVB grew out of a feedback loop that made it the place for startups to bank.
Also, a similar social dynamic, fueled by chat groups and social media, kicked in on the way down. Some even put sometimes-CoinDesk author Byrne Hobart at the center of things, because he wrote a supposedly well-read blog last month saying SVB was effectively insolvent. And so depositors like Roku, which left some $487 million uninsured at SVB, are not blameless.
Politicians, who like Florida Gov. Ron DeSantis are using the situation to justify their pet causes, once promised us “no more bailouts,” yet wrote the rules that allowed SVB to use a little accounting magic and hide billions in unrealized losses. Some, like former Rep. Barney Frank said Signature Bank, where he is now a board member, was attacked for political reasons because it dealt with crypto.
When Frank was in Congress he co-sponsored the legislation ultimately enacted as the 2010 Dodd-Frank Act, stymied bank failures. Signature had reportedly experienced the worst of its bank run and could have survived without government intervention, Frank said. If moral hazard is the argument that people will engage in riskier behavior if protected from the consequences of their actions, then we need a new term for Frank’s claims.
There were sound arguments for stepping in and preventing a cataclysmic blow to the valuable U.S. tech industry. Taxpayer money isn’t being used (at least not directly), deposits for growing businesses are safe, shareholders and bondholders aren’t being bailed out and even the New York Times is calling for clawbacks of SVB executive’s compensation and stock sales.
And, yes, there are solid arguments in favor of having let Silicon Valley Bank and Signature run their course. Expected losses were almost certainly exaggerated. A sound startup could have raised equity and banked elsewhere, and it would have put the fear of God back into the supposedly capitalistic U.S. economy.
But not bailing SVB and Signature out was never an option. Bank failures today are exceedingly rare and would cause a tremendous amount of panic, such as how the collapse of Silvergate Bank – essentially a free-floating entity detached from the wider economy – led here. And because SVB and Signature rode both the wave of cheap money created by Fed policy up and down, how separate can private and public interests really be?
So, if the U.S. government is officially in the business of bailing out banks, should you keep your money at a bank?
Hedge fund billionaire Ken Griffin says US should have let SVB die (Protos)
Without Verifiable Data via Web3, AI ‘Could Be Disastrous’: Space and Time CTO (Decrypt)
Fortnite’s Epic Has ‘Close to 20’ Crypto Games in Store Pipeline (Blockworks)
What the failures of Signature, SVB and Silvergate mean for the crypto sector (CNBC)
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