April 18, 2024

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Signature Failure, SVB, Silvergate: Impacts on the Crypto Sector

Signature Failure, SVB, Silvergate: Impacts on the Crypto Sector

  • Silvergate and Signature were the two main banks for crypto companies, while Silicon Valley Bank had a lot of crypto startups and VCs as clients.
  • The failure of the cryptocurrency banking trifecta spilled over into the stablecoin market over the weekend.
  • By Sunday night, when the Federal Reserve stepped in to support deposits at Signature and SVB, cryptocurrencies were on the rise and stablecoins regained their peg.

A man enters Signature Bank in New York City on March 12, 2023.

Reuters

Two once crypto-friendly banks and the largest tech startup bank have failed in less than a week. While cryptocurrency prices rose Sunday night after the federal government stepped in to provide support to depositors at two banks, the events sent instability to the stablecoin market.

Silvergate Capital, the central lender to the cryptocurrency industry, said on Wednesday It will terminate its operations and liquidate its bank. Silicon Valley Bank, the main lender to start-ups, collapsed on Friday after depositors withdrew more than $42 billion following the bank’s statement Wednesday that it needed to raise $2.25 billion to prop up its balance sheet. Signature, which also had a strong focus on crypto but was much larger than Silvergate, was seized Sunday night by banking regulators.

Signature and Silvergate were the two main banks for crypto firms, and nearly half of all US corporate-backed startups kept cash with a Silicon Valley bank, including crypto-friendly venture capital funds and some digital asset firms.

The federal government stepped in on Sunday to guarantee all deposits for SVB and Signature depositors, boosting confidence and sparking a small rally in the cryptocurrency markets. Bitcoin and Ether are both up about 10% in the last 24 hours.

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According to Nick Carter of Castle Island Ventures, the government’s willingness to support both banks indicates that it has returned to a mode of providing liquidity, rather than tightening, and that loose monetary policy has historically proven to be a boon for cryptocurrencies and other speculative asset classes.

But the instability has once again demonstrated the vulnerability of stablecoins, which are a subset of the cryptocurrency ecosystem that investors can usually rely on to maintain a set price. Stablecoins are supposed to be tied to the value of an asset in the real world, such as a fiat currency like the US dollar or a commodity like gold. But unusual financial circumstances can cause it to fall below its pegged value.

A lot of cryptocurrency problems in the past year have stemmed from the stablecoin sector, starting with the crash of TerraUSD last May. Meanwhile, regulators have been targeting stablecoins in the past few weeks. Binance’s dollar-pegged stablecoin, BUSD, has seen massive outflows after New York regulators and the Securities and Exchange Commission put pressure on its issuer, Paxos.

Over the weekend, confidence in the sector again took a hit as USDC – the second most liquid stablecoin pegged to the US dollar – lost its peg, dropping below 87 cents at one point on Saturday after its issuer, Circle, admitted to gaining 3.3%. Billion dollar. Bank with SVB. Within the digital asset ecosystem, Circle has long been considered one of the adults in the room, enjoying close connections and support from the traditional finance world. It has raised $850 million from investors like BlackRock and Fidelity and has long said it plans to go public.

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DAI, another popular virtual currency pegged to the dollar and partially backed by USDC, was trading as low as 90 cents on Saturday. Coinbase and Binance have both temporarily suspended USDC-to-dollar transfers.

on saturday, Some merchants started to barter USDC and DAI for Tether, the world’s largest stablecoin with a market capitalization of over $72 billion. Tether’s issuer has had no exposure to SVB and is currently trading above the $1 price as traders flock to safer pastures, despite the tether. Business practices have been questionedSo is the state of its reserves.

The stablecoin market started to recover as of Sunday evening after the circuit Published a blog saying that it would cover any shortfall using the company’s resources. Since then, both USDC and DAI have switched to pegging their currency to the dollar.

Now that it is clear that SVB depositors will be full, Carter told CNBC that he expects the US dollar to trade at par.

In the long run, the closure of the cryptocurrency banking platform trifecta could spell trouble for bitcoin, the world’s largest cryptocurrency, with a market capitalization of $422 billion.

Silvergate Exchange Network (SEN) and Sign to sign They were real-time payment platforms that crypto customers considered core offerings. Both allowed commercial customers to make payments 24 hours a day, seven days a week, through their instant settlement services.

“Bitcoin liquidity and crypto liquidity in general is going to be somewhat weak because Signet and SEN have been key for companies to get legal order over the weekend,” Carter said, adding that he hopes customer banks will step in to fill the void left by SEN and Signet.

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“These two banks have been the most bitcoin-friendly, supporting the lion’s share of mandatory settlement of bitcoin trades between US-based parties,” Mike Brock wrote in a post on social media app Damus. Brock is the CEO of TBD at Block, a unit focused on cryptocurrency and decentralized finance.

Although Carter believes that the Fed’s intervention to ensure depositors in the SVB will prevent a larger bank run on Monday, he says it is still disappointing to see the top three crypto-friendly banks shut down in a matter of days.

“There are very few options now for cryptocurrency companies, and the industry will be besieged with liquidity until the new banks get involved,” Carter said.

Longtime cryptocurrency investor and CEO Mike Bokella says many in the industry are focusing on Mercury and Axos, two other banks that cater to startups. Circle, meanwhile, has publicly stated that it is in the process of transferring assets to BNY Mellon now that Signature Bank is closed.

“In the near term, cryptocurrency banking in North America is a difficult place to be,” Busella said. “However, there is a long tail from rival banks that may take the slack.”