Signature, SVB, Silvergate Flaw: Effects on the Crypto Sector

Two of the banks friendly to the crypto sector and the largest bank for tech startups all failed in less than a week. While cryptocurrency prices rose on Sunday night after the federal government stepped in to provide a backstop for depositors in two of the banks, the events sparked instability in the stablecoin market.

Silvergate Capital, a key lender to the crypto industry, said Wednesday it would wind down operations and liquidate the bank. Silicon Valley Bank, a major lender to startups, collapsed on Friday after depositors pulled out more than $42 billion following the bank’s statement on Wednesday that it needed to raise $2.25 billion to shore up its balance sheet. Signature, which also had a strong crypto focus but was much bigger than Silvergate, was seized by banking regulators on Sunday night.

Signature and Silvergate were the two main banks for crypto companies, and nearly half of all US venture-backed startups held cash with 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 crypto markets. Both bitcoin and ether are almost 10% higher in the last 24 hours.

According to Nic Carter of Castle Island Ventures, the government’s willingness to stop both banks means it is back in liquidity-providing mode, rather than tightening, and loose monetary policy has historically proved a boon for cryptocurrencies and other speculative asset classes.

But the volatility once again showed the vulnerability of stablecoins, a subset of the crypto ecosystem investors can usually rely on to maintain a set price. Stablecoins are meant to be tied to the value of a real asset, such as a fiat currency like the US dollar or a commodity like gold. But unusual economic conditions can cause them to fall below their fixed value.

Many of the crypto problems of the past year originated in the stablecoin sector, beginning with TerraUSD’s collapse last May. Meanwhile, regulators have been on the hunt for stablecoins in recent weeks. Binance’s dollar-pegged stablecoin, BUSD, saw massive outflows after New York regulators and the Securities and Exchange Commission put pressure on issuer Paxos.

Over the weekend, confidence in the sector was dealt another blow when USDC – the second most liquid US dollar-pegged stablecoin – lost its peg, falling below 87 cents at one point on Saturday after issuer Circle admitted it had $3.3 billion banked at SVB. Within the digital asset ecosystem, Circle has long been seen as one of the adults in the space, with close connections and support from the traditional financial world. It raised $850 million from investors such as BlackRock and Fidelity and had long said it planned to go public.

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

On Saturday, some traders began to trade their USDC and DAI for tether, the world’s largest stablecoin with a market cap of more than $72 billion. Tether’s issuing company had no exposure to SVB, and it currently trades above the $1 peg as traders flock to safer pastures, although tether’s business practices have been questioned, as have government reserves.

The stablecoin market started to recover from Sunday night after Circle posted a blog post saying it would “cover any shortfalls using company resources.” Both USDC and DAI have since switched back to the dollar peg.

Now that it’s clear that SVB depositors will be made whole, Carter tells CNBC that he expects the USDC to trade at par.

In the long term, the shutdown of the crypto banking trifecta could spell trouble for bitcoin, the world’s largest cryptocurrency, with a market cap of $422 billion.

Silvergate Exchange Network (SEN) and Signatures Signet 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 respective instant settlement services.

“Bitcoin liquidity and crypto liquidity in general will be somewhat weakened because Signet and SEN were key for firms to get fiat over the weekend,” said Carter, who added that he is hopeful that client banks will step in to fill the void left by SEN and Signet .

“These were the two most bitcoin-friendly banks, supporting the lion’s share of fiat settlement for bitcoin trades between US counterparties,” Mike Brock wrote in a post on social media app Damus. Brock is the CEO of TBD i Block, an entity focused on cryptocurrency and decentralized finance.

While Carter believes the Fed stepping in to guarantee depositors of SVB will prevent a major bank run on Monday, he says it’s still disheartening to see the three biggest crypto-friendly banks taken offline in a matter of days.

“There are very few options now for crypto firms and the industry will be stuck for liquidity until new banks step in,” Carter said.

Mike Bucella, a longtime investor and leader in the crypto space, says many in the industry are moving to Mercury and Axos, two other banks that cater to startups. Meanwhile, Circle has already said publicly that it is moving assets to BNY Mellon now that Signature Bank is closing.

“Crypto banking in the short term in North America is a tough place,” Bucella said. “But there is a long tail of challenger banks that could pick up on that weakness.”