- Last week, Silvergate, Silicon Valley Bank and Signature Bank all had problems.
- Silvergate and Signature Bank provide important banking services to the crypto industry.
- It was the most dramatic days in the financial sector since the banking collapse in 2008.
The collapse of Silicon Valley Bank last week ushered in a period of unprecedented banking turmoil, last occurring during the 2008 global financial crisis (GFC).
While 2020 was a nightmare year for most, it was a boom year for the tech industry. People are spending more time on their phones and computers, conferencing software is coming into being, and a boom in new funding and hiring means the industry is more dynamic than almost any other part of the economy.
Silicon Valley Bank (SVB) is one of the leading banks in the technology sector, with $60 billion in customer deposits in the first quarter of 2020 and $200 billion in the first quarter of 2022. Recently.
Silicon Valley Bank was the biggest bank failure since 2008
However, the bank, which invests in Treasuries and mortgage-backed securities, suffered heavily when the Fed raised interest rates in response to rising inflation. Silicon Valley Bank sells assets to minimize losses. But when it announced it needed to raise $2.25 billion, customers withdrew $42 billion in deposits. Regulators closed the bank the next day. It was the biggest Bank of America failure since the 2008 global financial crisis.
On Sunday, however, the U.S. government announced that depositors would begin withdrawing cash on Monday. All depositors will be fully protected, easing fears of a wider crisis. The U.S. Treasury, the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) have all said taxpayers will not bear any losses in the move.
At the same time, a consortium of investors, led by the Bank of London, submitted a formal tender to the UK Treasury for the acquisition of the UK branch of SVB. The UK government has been working on a plan to support UK tech companies affected by the collapse of SVB.
While Silicon Valley Bank is not as vulnerable to cryptocurrencies as Silverware, it has created rifts across the industry.
USDC decoupled after the collapse of Silicon Valley Bank
The stablecoin USD Coin (USDC) fell to a low of $0.879 on CoinMarketCap. Circle, the company behind USDC, has $3.3 billion exposure to SVB, raising concerns among investors that stablecoins may not be able to maintain a peg to the US dollar. Although this $3.3 billion represents only $40 billion of USDC's total reserves.
During the announcement of the closure of Silicon Valley Bank, the stablecoin USDC fell to a low of $0.879
"Silicon Valley Bank ... Just suffered a typical bank run, like we saw during the 2008 financial crisis," the company said in a blog post on Saturday. USDC's $3.3 billion cash reserve remains in SVB. As of Thursday, we have begun transferring these funds to other banking partners. Although these transfers had not been settled as of Friday's close, we are confident in the FDIC's management of the SVB situation and stand ready to receive these funds. ”
Why do bank failures affect stablecoin pegs? Part of the reason is that USDC is fully backed by reservations. This means that each USDC is backed by real cash and short-term US Treasuries. If a portion of that reserve disappears or is lost – even temporarily – the market will lose confidence. Investors will worry about whether stablecoins can hold their value.
Then there's Silvergate, whose collapse came just days before SVB's turmoil.
Cryptocurrency-friendly banks had a nightmare week
The bank, which has high-profile clients such as Coinbase, Gemini, Paxos and Circle, blamed its woes on the collapse of Sam Bankman-Fried's FTX trading empire. The bank's share price fell 20% after the Justice Department announced an investigation into its role in the FTX's collapse.
The collapse of Silvergate left a hole in the U.S. cryptocurrency industry, with many cryptocurrency exchanges struggling to transfer dollars to their trading accounts and into their bank accounts. Companies like Coinbase, Crypto.com, and Paxos were quick to distance themselves from banks.
Unfortunately for cryptocurrencies, Silvergate's implosion could lead to more scrutiny from lawmakers. There are growing concerns about the industry's impact on traditional finance.
"As the effects of the FTX crash continue to spread outward, today we see what happens when banks become overly reliant on high-risk, volatile industries like cryptocurrencies," said progressive U.S. Senator and Senate Banking Chairman Sherrod Brown, of the Housing and Urban Affairs Committee.
"I've always been concerned that when banks get involved in cryptocurrency, it spreads the risk across the financial system, and it will be taxpayers and consumers who pay the price."
After Silvergate announced its voluntary liquidation, blockchain companies turned to Signature Bank. One of the last banks in the United States to provide financial services to a volatile industry. However, two days after the collapse of Silicon Valley Bank, the New York Department of Financial Services took over Signature Bank, which had a total deposit of $88.59 billion.
For cryptocurrency companies working with Signature, the announcement immediately relieved them that their deposits would be protected. But that leaves the open question of where they will find banking services.
What does the unbanked future look like?
And what about the fintech utopia promised by crypto? Why did the collapse of two banks throw the cryptocurrency market into chaos? Shouldn't cryptocurrencies replace the traditional financial system?
It was, or it still can. It all depends on who you ask. However, the harsh truth is that cryptocurrencies still exist in the broader financial system, and traditional banks are an important part of that. Even if your crypto principles mean you want to avoid dealing with banks as much as possible, the people who invest in your company, the people who trade your tokens, and the other businesses you work with will think differently.
The "unbanked" future that many envisioned became almost a reality this week. Although it's not quite what people think.
Of course, before you can pay for more goods and services with cryptocurrency, traditional retail banking will be a must.
Unfortunately for cryptocurrency maximists, traditional-style banks are the axis of wheel rotation of the financial system. When they fail, cryptocurrencies inevitably suffer.
In addition, DeFi is not mature enough to completely replace banks. The total market capitalization of DeFi is less than $50 billion. The size of the traditional financial industry is measured in trillions of dollars. Before reality changes, the crypto industry needs to pay attention to the importance of these financial giants.
Thank you for meeting you on the road to wealth and freedom, let's move forward side by side together!! Welcome to join us - public number: Maori Say Coin Q
If you like it, please like and follow to bring more articles you appreciate in the future!
Thanks for reading! See you in the next issue!