The collapse of Silicon Valley Bank (SVB), which suffered a bank run after revealing a hole in its finances over the sale of part of its inflation-hit
The collapse of Silicon Valley Bank (SVB), which suffered a bank run after revealing a hole in its finances over the sale of part of its inflation-hit bond portfolio, led to a depegging event for major stablecoins in the crypto sector, leaving many to wonder whether it was a simple stress test or a sign of weakness in the system.
The second-largest stablecoin by market capitalization, the Centre Consortium’s USD Coin (USDC), saw its value plunge to $0.87 after it was revealed that $3.3 billion of its over $40 billion in reserves was held at SVB and was, as a result, possibly lost. Coinbase seemingly exacerbated the crisis when it, a member of the Consortium, announced it was halting USDC-to-dollar conversions over the weekend.
As USDC lost its peg, so did decentralized stablecoins using it as a reserve asset. The most notable of which is MakerDAO’s Dai (DAI), a cryptocurrency-backed stablecoin that has well over half of its reserves in USDC.
Stablecoins restored their peg after the United States government stepped in and ensured depositors at SVB and Signature Bank would be made whole, in a move meant to stop other entities from suffering irreparable damage. According to United States President Joe Biden, taxpayers did not feel the burn of the bailout, and the traditional finance system was safe after the intervention.
Update thread on USDC
We were heartened to see the US government and financial regulators take crucial steps to mitigate risks extending from the fractional banking system.
100% of deposits from SVB are secure and will be available at banking open tomorrow.
— Jeremy Allaire (@jerallaire) March 12, 2023
The crisis, however, did not end there. While the U.S. government stepping in helped stablecoins recover their peg, many quickly pointed out that taxpayers would ultimately suffer the depositors’ bailout.
The banking crisis’ effects on digital assets
Financial institutions have since banded together to protect other banks, with investors and depositors raising questions about the stability of a number of other institutions, including Deutsche Bank.
Credit Suisse collapsed after investments in different funds went south and an unsubstantiated rumor on its impending failure saw customers pull out over 110 billion Swiss francs of funds in a quarter from it, while it suffered a loss of over 7 billion CHF.
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The collapse saw the Swiss government broker an “emergency rescue” deal where Credit Suisse was acquired by rival UBS at a steep discount. Speaking to Cointelegraph, Jason Allegrante, chief legal and compliance officer at blockchain infrastructure company Fireblocks, said that the banking crisis was partly caused by rising interest rates exposing banks with large portfolios of low-interest-rate bonds to risk.
Per Allegrante, the role of the liquidity coverage ratio, a regulatory requirement forcing banks to hold a certain amount of “high-quality liquid assets” to prevent these liquidity crunches, is not being openly discussed.
He said it’s “entirely possible we are in the early stages of a nationwide run on regional banks.” If this happens, he said, there will not only be widespread regional bank failure but there will “likely be further consolidation and concentration of deposits in a handful of large, systematically important banks.”
He added that such a crisis would put pressure on regional banks to sell assets to meet liquidity needs and could ultimately lead to more bank failures. Allegrante added that this would have “far-reaching consequences for the digital asset industry in the United States and abroad.”
Becky Sarwate, spokesperson and head of communications at cryptocurrency exchange CEX.io, told Cointelegraph that the crisis could be a boon for digital assets, saying:
“One thing is clear: Similar to how Bitcoin blossomed from the wreckage of the 2008 financial crisis, the failure of institutions like SVB and Signature Bank is compelling evidence for diversification across multiple investment verticals.”
Sarwate added that when “traditional pathways prove equally volatile from the perspective of a crypto curious participant, it throws the inherent risk of any market participation into relief.” She added that while digital assets lack some of the protections seen in traditional finance, they “offer an alternative set of benefits that, in our current climate, could be appealing to nervous investors.”
Investors holding onto stablecoins and earning yield through them, however, may have believed they were already diversifying and sidestepping the market rout that was occurring. Circle, the issuer of USDC, suggested the depeg event was a “stress test” that the system weathered.
Mitigating risk for stablecoins
If the Federal Deposit and Insurance Corporation (FDIC) were to extend insurance to crypto-related institutions, it could alleviate concerns about the security of digital…
cointelegraph.com