March 12, 2023
Indeed, the recent crisis at SVB has had a notable impact on the cryptocurrency industry.
Why did it happen?
Silicon Valley Bank (SVB) is a top US bank for startups and venture capitalists, with a history of supporting innovative companies like Tesla, SpaceX, and Uber. Many cryptocurrency companies in the US rely on SVB as their primary banking partner.
SVB's struggles can be traced back to the Federal Reserve's decision to raise interest rates a year ago to combat inflation. This move weakened the tech stock market, which had been a key source of growth for the bank. Additionally, SVB and other banks had invested heavily in long-term bonds during the era of near-zero interest rates, but these bonds lost value as interest rates rose. SVB's bond portfolio, valued at $21 billion, was yielding an average of 1.79%, significantly less than the current 10-year Treasury yield of 3.9%. Finally, as venture capital dried up, startups began drawing down funds held by SVB, resulting in unrealized losses in bonds and a surge in customer withdrawals.
Crypto Shaken as SVB Exposure Depegs $ 37 Billion Stablecoin
USDC fell from its intended $1 peg, trading as low as 81.5 cents as investors reacted to the exposure of Circle to SVB. Circle has confirmed that $3.3 billion worth of USDC reserves is locked up in SVB. The depegging event caused losses of more than $1 billion in stock and deposits. Justin Sun reportedly withdrew 82 million USDC, which is worth $75.26 million at the time of publication, from the decentralized finance (DeFi) protocol, Aave v2, over a series of transactions and swapped from DAI. MakerDAO, the stablecoin’s issuer, filed an emergency protocol to prevent panic selling. Curve Finance reported a historic all-time high daily trading volume of $5.67 billion due to the events. Other crypto companies affected include Coinbase, BlockFi, Avalanche, Pantera, Yuga Labs, Proof, Nova Labs.
Although Changpeng "CZ" Zhao and Tesla billioniare Elon Musk have both floated the idea of buying Silicon Valley Bank, the depegging of USDC has sent shockwaves through the market, causing significant losses and eroding investor confidence.
Is this the domino effect's start or end?
While the government and Treasury Department are taking measures to prevent a full-blown financial crisis, the threat of inter-bank bad debts looms large, leaving small and medium-sized banks exposed to collapse in the near future. The lack of transparency and accountability in centralized organizations is a ticking time bomb that highlights the urgent need for greater adoption of decentralized finance (DeFi), as demonstrated by the fall of FTX and SVB.
If three or more major US banks face redemption issues, both USDC and USDT will face a significant depegging crisis, which will take longer to resolve than the current one. The current crypto landscape is a product of the traditional financial organizational structure, and is unable to fully isolate the transmission of traditional financial crises. Only verified algorithmic stablecoins can offer the resilience needed to weather future storms. Yes, UST is not the endpoint of algorithmic stablecoins. The holy grail of DeFi will eventually be realized, marking the true freedom of crypto.
The full impact of this crisis is yet to be felt because it could have ripple effects on other banks and financial markets around the world. The cryptocurrency industry is still vulnerable and lacks an established immune system, leaving it at risk of being severely impacted by traditional financial crises in the short term. The path ahead remains uncertain. Is the best or the worst yet to come?