Yesterday's start of the banking crisis could mark the end of traditional banking as we know it, similar to what happened in 2008 with Bear Stearns and Lehman Brothers. Two years after the collapse of these banks, trust in traditional banking was destroyed, and the trend shifted towards safety.
In 2010, the fintech industry saw a rise, and the new direction was towards Financial technology. Blockchain technology and tokenization may become safety narratives in the financial system today.
Signature, SVB and Silvergate Banks Collapse
Two banks friendliest to the crypto sector and the biggest bank for tech startups failed in less than a week. While cryptocurrency prices rallied Sunday night after the federal government stepped in to provide a backstop for depositors in two banks, the events sparked instability in the stablecoin market.
Silvergate Capital, a central lender to the crypto industry, said on Wednesday that it would be winding down operations and liquidating its bank. Silicon Valley Bank, a significant lender to startups, collapsed on Friday after depositors withdrew more than $42 billion following the bank's Wednesday statement that it needed to raise $2.25 billion to shore up its balance sheet. Banking regulators seized Signature, which had a strong crypto focus but was much larger than Silvergate, on Sunday evening.
What does it Mean for Crypto?
Signature and Silvergate were the two leading crypto companies' leading banks. Nearly half of all U.S. venture-backed startups kept 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, adding confidence and sparking a small rally in the crypto markets. Bitcoin and Ether have been nearly 10% higher in the last 24 hours.
According to Nic Carter of Castle Island Ventures, the government's willingness to backstop both banks signifies its back in providing liquidity rather than tightening. Loose monetary policy has historically proven to be a boon for cryptocurrencies and other speculative asset classes.
But the instability again showed the vulnerability of stablecoins, a subset of the crypto ecosystem investors can typically rely on to maintain a set price. Stablecoins are supposed to be pegged to the value of a real-world asset, such as a fiat currency like the U.S. dollar or a commodity like gold. But unusual financial conditions can cause them to drop below their pegged value.
Stablecoins
Many of crypto's problems in the last year originated in the stablecoin sector, beginning with TerraUSD's collapse last May. Meanwhile, regulators have been homing in on stablecoins in the previous few weeks. Binance's dollar-pegged stablecoin, BUSD, saw massive outflows after New York regulators and the Securities and Exchange Commission pressured its issuer, Paxos.
Over the weekend, confidence in this sector again took a hit as USDC – the second-most liquid U.S. dollar-pegged stablecoin – lost its peg, dropping below 87 cents at one point on Saturday after its issuer, Circle, admitted to having $3.3 billion banked with SVB. Within the digital assets ecosystem, Circle has long been regarded as one of the adults in the room, boasting close connections and backing from traditional finance. It raised $850 million from investors like BlackRock and Fidelity and had long said it planned to go public.
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