Institutional investors in the financial sector were caught off guard on March 10, 2023, when Silicon Valley Bank (SVB) collapsed due to customer withdrawals and losses from securities positions affected by the Federal Reserve’s interest rate hikes. SVB was a crypto-friendly bank that held deposits and investments for many crypto firms and projects, including Circle, the creator of the stablecoin USDC.
The collapse of SVB occurred only two days after Silvergate announced that it would be winding down operations and liquidating its bank. It then led to the failure of yet another crypto-friendly bank: Signature Bank. All three banks were important for providing banking services to crypto companies and facilitating transactions between fiat and crypto currencies.
Signature Bank and Silvergate were among the banks that suffered from the SVB collapse, as they had invested heavily in SVB’s securities and faced a run on deposits from their customers. Already on March 8, 2023, Silvergate announced that it would be winding down operations and liquidating its bank. This meant that SEN, Silvergate’s real-time payment platform that enabled crypto companies to transfer fiat currency between each other and to crypto exchanges 24/7, was shut down, and crypto companies could no longer use it for fiat transfers. On March 12, 2023, Signature Bank was seized by New York regulators who cited “systemic risk” at the bank. This meant that Signet, Signature Bank’s payment platform, was also terminated, and crypto companies lost another payment option.
The closure of these two banks had a significant impact on the crypto sector, especially on stablecoins like USDC that relied on them for minting and redeeming processes. Without 24-hour access to fiat currency, stablecoins faced liquidity issues and depegging risks. USDC temporarily depegged to 0.87$.
The Federal Reserve and the US Treasury intervened to calm the financial markets and ensure that SVB’s customers would be able to access their deposits, but they did not bail out the bank’s investors. The Fed announced an emergency lending program that allows banks to borrow against the full face value (“at par”) of government bonds and mortgage-backed securities for up to one year. According to the Fed, this program will help banks avoid selling these securities at a loss and flooding the market with paper, as well as provide liquidity and stability to the financial system. The Fed’s new program is seen as a response to the collapse of SVB, which sold $21 billion of securities from its portfolio at a loss of $1.8 billion, triggering a run on deposits and contagion fears among other banks.
As an effort to further stabilize the current situation, the market expects the Fed to at least temporarily halt its aggressive QT path and apply a 0 BPS rate hike in march. While the Fed still stands by its ambition to fight inflation by QT, it could mean a turning point.
Despite all regulatory pressure, bitcoin gained over 20% after those events. The rally for bitcoin was led by bank mistrust sentiment and outperformed most of the other top 100 cryptocurrencies. Additional fuel was the speculation that the Fed now starts changing its policies, as stated above, and is expected to suspend further rate hikes for the moment.
Looking ahead, the recent change of strategy by the Fed may mean new liquidity for the markets and risky assets like Bitcoin will profit. However, it is not clear how long the Fed will keep its QT suspension, which would bring back the pressure. The increased risk for contagion in the crypto industry from the recent events is also a concern. If more institutions come under pressure, this could be a risk for crypto valuations in the short term. It remains to be seen whether the crypto sector can weather the storm and emerge stronger or if it will face further setbacks in the coming months. Investors should remain vigilant and cautious as the situation evolves.
Overall, it can be argued that the US banking crisis has created a new opportunity for crypto to thrive as a more robust and inventive alternative to the traditional financial system. However, it is important to note that the US crypto industry has faced increased regulatory scrutiny from the SEC. In our upcoming article, we will delve into the latest regulatory developments and analyze their impact on the future of crypto in the US and beyond. Please stay tuned for further insights.
