The past week has been packed with panic over the collapse of Silvergate Bank, Silicon Valley Bank, and Signature Bank. We’d like to provide some insight as to what we think happened, as well as an update on how this affects clients of Secure Digital Markets.
Turmoil in the U.S. banking industry is never good, but these banks had particularly strong affiliations with the cryptocurrency market. Many firms are struggling, and we’re sending our best wishes out to them. We are here to help and if the SDM infrastructure can be of any help, please don’t hesitate to reach out.
The Post-Mortem
The basic gist of Silicon Valley Bank is that they made a (now proven to be incorrect) bet that interest rates wouldn’t go up and invested their money in Mortgage-Backed Securities (MBS) yielding ~1.5%.
Management spooked the market by selling $21B of these bonds at a $1.8B loss and then attempting to raise $2.3B of common and preferred equity (which didn’t succeed).
The real problem was the ensuing bank run as higher-sophistication clients realized there was a funding gap and started pulling out their money. Others soon followed, causing the eventual bank failure.
Regulators closed SVB in order to manage the winddown themselves, thus zeroing out equity and most unsecured debt. Silvergate Bank and Signature Bank suffered similar fates after a mix of bad bets and bank runs.
On March 12th, the Federal Reserve announced they would be covering all depositors. With deposits backstopped, all depositors will be made whole, even the uninsured amounts.
Circle and USDC Coming Into Question
Also of relevance to the crypto industry is the story that emerged over the weekend of Circle and their USDC stablecoin.
For a long time, the market has been focused on USDT and whether they truly have their reserves backed at a 1:1 ratio. But stablecoin-issuer Circle was keeping several billion of funds with Silicon Valley Bank.
[https://twitter.com/circle/status/1634341007306248199]
If this money had truly been lost, that would have made the fair value of one USDC token around $0.92. USDC de-pegged as this hit the news. Chaos followed over the weekend as traders tried to arbitrage across different exchanges and USDC holders tried to hedge their risk.
This is not a normal “stablecoin” price chart:
Of course, now that we know the US Government is going to backstop all deposits for Silicon Valley Bank, USDC is going to be fine. But this may have caused irreparable damage to “stablecoins”.
It’s important to remember that until this weekend, USDC was the most corporate-friendly asset in crypto. No one wants to have to audit the numerous banking partners of their stablecoin, and it starts to look more appealing to move money back into fiat.
All of this is extra important because Silvergate and Signature Bank were the two banks that facilitated Circle’s 24/7 minting and redemption.
The Banking Landscape Is About to Change
At $209B in assets, Silicon Valley Bank represents the second-largest bank collapse in history (after Washington Mutual Bank). Signature Bank is the third-largest bank collapse, with $110B in assets.
The first thing to reiterate is that the world is not ending. These bank runs are very different from 2008 and the FDIC is designed to oversee bank failures. Nothing about the last week is a threat to the U.S. banking system.
Social media and news sites were blasted with coverage declaring this an imminent crisis, and it’s starting to look like these were extremely overblown.
It’s still too early to say exactly what will happen, but there are a few different outcomes we expect going forward:
- More pressure on the banking industry. Consumer groups and regulators will look for ways to prevent the sort of management decisions that led to these bank failures.
- More risk-taking within the banking industry. With the backstop, the incentives point to swinging big with the knowledge that the government will cover the depositor bill if your strategy fails.
- Retail and business clients alike will be less likely to hold over $250K of funds with banks that don’t fit in the “too big to fail category.”
- Crypto starts to become a prudent part of corporate treasury management. Self-custody guarantees the safety of funds and you know your money isn’t being irresponsibly lent out.
Finally, the big lesson of 2022 continues to rage on. It’s clearer than ever how important it is to be selective with your counterparties.
After This Black Eye, Crypto Will Recover
The 3 banks in question were great partners for many years to emerging industries like ours, and we were deeply saddened to learn of their demise.
Please note that Secure Digital Markets holds no customer funds at any of these banks. In fact, we don’t hold customer funds at all, so our clients remain unaffected by this. Additionally, our lending partners are a family office based in Europe and have no exposure to this crisis.
We have confidence that the cryptocurrency market will weather through this storm. We also know it is a difficult time for many of our friends and competitors in the cryptocurrency market who may have their personal holdings or business operations affected.
The cryptocurrency industry is hyper-cooperative, and we are proud to see how many people are offering solutions, putting out new ideas, or sharing banking contacts in an effort to ease the effects of these bank failures.
In this testing time, we want to make sure that everyone is safe and covered. Please reach out if there is any way the Secure Digital Markets infrastructure can help you. We will continue to provide relevant updates as the situation develops and appreciate your continued support.
For any questions about our new platform and offerings, book a consultation with our trading team.
About SDM
Secure Digital Markets (SDM) is a digital asset brokerage operating globally to provide OTC spot trading, crypto-backed lending, and derivatives trading services to institutional, high net worth, and corporate clients across 60+ international markets. SDM offers a custom pathway to digital asset liquidity and off-exchange transactions. SDM streamlines the acquisition, storage, and liquidation of digital assets in a secure and compliant manner.
Our clients use our services to unlock liquidity and take advantage of current opportunities in the market. Visit our website today to learn more about our services and how SDM can help you to maximize your digital assets.