Weekend Recap – Silvergate, SVB, and Signature Shuttered

The crypto market took a massive hit after the failure of two regional US banks, Silicon Valley Bank (SVB) and Signature Bank, which came after crypto-focused Silvergate Bank’s collapse.

But heading into a new week, things appear to be stabilizing. The cryptocurrency prices are bouncing back as officials promise to safeguard the US economy while strengthening the public’s faith in the nation’s banking system.

Let’s see what went down over this past weekend!

Silicon Valley Bank (SVB) Collapse

Silicon Valley Bank, a bank that specialized in VC funding, mostly for the technology industry, failed on Friday after a massive deposit rush left it unable to keep itself afloat. The event sent shock waves across the tech and banking industries.

SVB was the 16th largest bank in the United States, and its crash was the second-largest bank failure in US history and the first of this kind since the 2008 recession. In Sept. 2008, Washington Mutual failed, with $307 billion in assets and $188 billion in deposits. Compared to this, SVB had $209 billion worth of assets and $175 billion in deposits shortly before it went bankrupt.

Founded in 1983 in California, SVB was one of the biggest supporters of the technology industry and claimed to have banked about half of all the US venture-backed startups as of 2021. In addition to tech companies, it has served media companies as well as a handful of crypto companies such as Circle. In fact, SVB had deposits from more than 2500 VC firms.

What happened with SVB was that its client deposits soared during the pandemic, going from $60 billion at the end of 1Q20 to about $200 bln in 2022. Later, the bank invested these funds in safer instruments such as bonds.

After the 2008 recession, the US had a very low-interest rate, which guaranteed low-cost loans, and VCs invested an increasing amount of capital into startups. This, in turn, benefited banks such as SVB since those startups used them for deposits.

The scenario started changing last year, with the US Federal Reserve started raising interest rates, sending them from 0.25-0.50% in March 2020 to 4.5%-4.75%. Fed Chairman Jerome Powell has recently said the rate could rise as high as 5.75%.

Higher interest rates reduced the returns on bonds and led to slower financing of startups, reducing SVB’s pace of deposits.

On March 8, the bank said that to provide liquidity, it sold $21 billion in securities for $1.8 billion in losses and is also planning to sell $2.2 billion in stock, resulting in Moody cutting down the bank’s credit rating. And on the same day, Peter Thiel’s Founder’s Fund asked its portfolio companies to pull out their money from SVB, followed by several other VCs like Union Square Ventures and Coatue Management.

On March 9, customers tried to withdraw $42 billion from the bank alone, equivalent to one-quarter of the bank’s total deposits. SVB could not accommodate such high demand to divest on such short notice. The bank’s shares were stopped from trading as the bank tried to unwind.

Regulators shortly intervened and closed down the bank. The Federal Deposit Insurance Corp. (FDIC) then created a new bank to handle all SVBs insured deposits, which is scheduled to open on March 13.

Reports suggest 93% of deposits at SVB were not insured by the FDIC. The FDIC insures deposits only up to $250k. However, regulators assured depositors would have access to “all of their money” starting Monday.

In a joint statement, the FDIC, the Fed, and the Department of Treasury said on Sunday that the US banking system remains robust and “on a solid foundation.” Joe Biden’s administration further announced that taxpayers would not be on the hook for losses related to SVB’s resolution.

After regulators announced the plan to support all depositors at SVB and make more capital available for other banks, the US stock market rose on Sunday night.

On the other hand, HSBC announced that it would purchase the British unit of the bank for £1. As part of the deal, customer deposits will be protected early on Monday.

After Silvergate, Crypto-friendly Signature Bank Shutters Too

But that wasn’t all. In yet another hit to the banking system, state regulators closed New York-based Signature Bank on Sunday, marking the third bank to shutter its doors in a matter of a week. The closing is the result of a ripple effect that has extended from SVB’s collapse to other lenders.

The bank reported deposits of $89.17 billion as of March 8 and had assets of about $110.36 billion as of December 31. Signature’s collapse is the third largest in US banking history.

Much like with SVB, regulators announced “a similar systemic risk exception for Signature Bank” and assured that “all depositors of this institution will be made whole.”

In a statement on Sunday, President Joe Biden said that he would address the US banking system on Monday. He also promised to hold the people responsible for bank failures and to continue “efforts to strengthen oversight and regulation of larger banks so that we are not in this position again.”

For those unfamiliar with Signature, it was a crypto-friendly bank that has been serving the sector since 2018 but began phasing out after the blowup of the crypto exchange FTX. However, as of March 8, it still had $16.5bn in deposits from cryptocurrency-related customers.

Last week, Silvergate Capital, a significant lender to the crypto industry, also winded down its operations and liquidated its bank. Both Silvergate and SVB had invested in the US Treasuries, which lost value as the Fed increased interest rates. As a result, these banks were forced to sell these bonds at a loss to maintain their capital position.

Banks’ Shutdown Takes Toll on Crypto

The crypto market has been coming off of a volatile year only to be hit by three bank failures – SVB, Silvergate, and Signature Bank.

Signature Bank came to prominence after FTX failed late last year, which had accounts at the bank. While FTX was a major customer of Silveragte, Signature bank said that FTX funds represented less than 0.1% of its total deposits.

In December, following FTX’s collapse, Signature said it planned to divest up to $10bn of deposits from crypto customers to bring that down to about 15-20% of its total deposits.

Both Signature and Silvergate enabled faster customer payments, supporting digital asset liquidity.

Signature operates Signet, a payments network that allows commerce crypto customers to make dollar-based payments in real-time, 24/7. Following the shutdown of rival Silvergate’s SEN network a few days ago, Signet became the sole option for numerous crypto customers.

The largest US crypto exchange, Coinbase, integrated Signature last October to enable clients to send funds instantly. Coinbase also said on Friday that it had $240 million in balances at the bank. Paxos Global said it had $250 million in the Signature bank. Now-bankrupt crypto lender BlockFi meanwhile has $227 million locked up in SVB.

The potential failure of Signet could lead to significant difficulties for users seeking to quickly enter or exit exchanges, which could have a drastic impact on the liquidity of the cryptocurrency market. Kaiko, a research firm, has reported that the convenience of trading Bitcoin-to-USD and Bitcoin-to-USDT transactions have already decreased by 35% to 45% since early March through Saturday.

The collapse in Signature is likely to magnify this effect. However, some alternatives are emerging.

Crypto trust companies, which already hold customers’ digital assets and have relationships with banks, are contemplating entering the fray with similar functionality as SEN.

BCB Group is one such company that operates Blinc, a payment network similar to SEN for crypto companies popular in Europe. It is hoping to launch soon in the US with three or four banks, said Oliver von Landsberg-Sadie, a co-founder at BCB Group. BCB has received over 60 inquiries and is planning to launch the Dollar Payment feature for its first half-dozen customers next week.

USDC-issuer Circle Caught in the Crosshairs

SVB’s collapse also triggered a knock-on effect on stablecoins over the weekend. Crypto giant Circle Internet Financial Corp., the issuer of the second-largest stablecoin USDC, revealed that it had $3.3bn of reserves in the bank. These funds amounted to about 8% of USDC’s $40bn reserves. In its announcement, Circle also noted it had no exposure to Silvergate.

Following Circle’s announcement, Binance, and Coinbase suspended withdrawals of USDC stablecoin.

“Circle is currently protecting USDC from a black swan failure in the US banking system,” Circle chief strategy officer, Dante Disparte, said on Twitter. “Silicon Valley Bank is a critical bank in the US economy, and its failure—without a Federal rescue plan—will have broader implications for business, banking, and entrepreneurs.”

The news caused Circle’s stablecoin USDC to fall below the intended one-to-one peg to the USD, sending shockwaves throughout the markets.

USDC fell as low as 86 cents on Saturday before the company assured that USDC reserves were secure and announced it had added Cross River Bank as its new commercial banking partner. At the time of writing this, USDC is back to trading at $0.99, according to CoinGecko.

Circle’s CEO, Jeremy Allaire, tweeted that the company would no longer be processing the minting and redeeming USDC via the Signet and would instead rely on the BNY Mellon for settlements. BNY Mellon is already providing custody services for the company’s reserves.

“100% of USDC reserves are also safe and secure, and we will complete our transfer for remaining SVB cash to BNY Mellon,” Allair said.

In addition to expanding its relationship with BNY Mellon, Circle also relies on the asset manager giant BlackRock to manage transactions related to its USDC reserves.

Crypto Market Rallies After Weekend Dump

Over the weekend, as Circle’s $40 billion USDC started losing its peg, the crypto market prepared for significant volatility. And as a result, Bitcoin experienced a drop to nearly $19,500, while ETH plummeted as low as $1,370, and the total crypto market cap lost billions of dollars as it fell to about $958 billion.

The crypto sell-off has aligned with the US stock markets, including the tech-heavy Nasdaq.

Amidst this, gas fees soared as investors rushed to move their funds. The median gas fee on Ethereum jumped as high as about 231 gwei, according to Nansen.ai, up from about the 20-40 range seen earlier Friday.

The average Bitcoin transaction fee also spiked from $1.9 earlier this week to $2.8 on March 9 as traders moved to protect their crypto, according to YCharts.

After the devastating 2022, the crypto market had a green start to 2023, only for crypto-focused banks to collapse. Additionally, there are concerns about rising interest rates, as Powell indicated, which can adversely impact risk assets like stocks, particularly cryptocurrencies. The increase in interest rates over the past year has already had a dampening effect on the crypto market.

“There is just little reason to buy bitcoin now as the market is saturated with negative developments, not just specifically for the crypto industry, but also for the wider financial market as well,” Yuya Hasegawa, an analyst at Japanese crypto firm Bitbank, told CNBC.

After the negative price action over the last week, the prices of crypto assets climbed on Monday alongside a jump in US equity futures. Bitcoin has breached $24,000, and Ether surged to $1,635+. With these gains, the total market cap is now back above the $1 trillion mark.

While the stock market is in green and the entire crypto market is enjoying 5% to 20% gains, the US dollar fell on Monday as authorities moved in to limit the impact of the sudden meltdown of several banks.

Crypto market participants believe the current environment is positive for Bitcoin, which was created in response to the 2008 crisis. As people lose trust in traditional financial systems and seek alternatives for storing and transferring wealth, alternative decentralized currencies like Bitcoin can potentially see an increase in demand. As such, the collapse of banks could lead to higher adoption of cryptocurrencies as a means of payment and investment.