In this issue
- USDC: Level-pegging
- Silvergate: Closing act
- China finance: Reverse decentralization
From the Editor’s Desk
Predictions that things will get worse before they get better are commonplace among the punditocracy in their comments on virtually any subject one cares to name. But they’ve arguably become even more common in crypto than in other fields following the industry’s travails during the past year. So far, so unsurprising.
The failure of cryptocurrency-focused lender Silvergate, which had been widely expected since at least the beginning of this month, alongside the collapses of Silicon Valley Bank and Signature Bank, are very much of a piece with this narrative.
The closure of the Silvergate Exchange Network and Signature Bank’s Signet, real-time payment platforms that allowed clients to move money into crypto around the clock, is already affecting crypto trade. The two services handled a huge chunk of fiat settlement for crypto, and their disappearance from the market is crimping liquidity, threatening to send transaction costs higher, at least in the short term.
Where the darkest-before-the-dawn narrative starts to get interesting, though, involves what comes next. As we’ve seen, the crypto industry has an uncanny knack of finding creative ways out of tight spots, and in any case, it’s a sector that’s experiencing growing pains like any other as it moves through its teenage years and into adulthood.
The banking system didn’t collapse during the global financial crisis 15 years ago when the titans of TradFi were shaken to their foundations, and neither will crypto as it loses some important players but finds others to take their place.
The strife stirred up by Silvergate, SVB and Signature will pass, and, since nature abhors a vacuum, new providers of similar services will doubtless swoop in and fill the gap they leave in likely even more innovative ways.
If there’s one thing that being in this industry should have taught all of us by now, it’s that nothing stays the same for long and that this frenetic pace of change is what keeps the sector at the cutting edge as it continues to shape the future of finance.
We of course regret the trifecta of failures that have occurred in recent days. But long live disruption.
Until the next time,
Founder and Editor-in-Chief
1. Stable genus
By the numbers: USDC — over 5,000% increase in Google search volume.
Circle Internet Financial’s USDC, the world’s second-largest stablecoin by market capitalization, regained parity with the U.S. dollar on Monday morning Asia time after the Federal Deposit Insurance Corporation (FDIC) said it had taken over failed tech- and crypto-focused lender Silicon Valley Bank (SVB) and guaranteed its deposits to prevent a broader bank run.
- USDC fell as low as US$0.8774 on Saturday before recovering to US$0.999 around mid-morning Hong Kong time on Monday, according to CoinMarketCap data. It has mostly hovered around the US$0.997 mark since.
- USDC regained its peg after the FDIC said it had taken control of SVB on Sunday. Circle had held US$3.3 billion of deposits, accounting for around 8% of total USDC reserves, at the troubled bank.
- USDC started trading off its peg over the weekend after it was revealed that it held reserves at SVB, which had more than US$200 billion in assets and represents the largest bank failure since the global financial crisis of 2008.
- SVB and Signature Bank, two key lenders to the crypto industry, were both shut down and taken over by U.S. regulators to prevent systemic risk to the broader banking industry.
- “All depositors of [Signature Bank] will be made whole,” said a joint statement released by the U.S. Treasury Department, the Federal Reserve and the FDIC. “As with the resolution of Silicon Valley Bank, no losses will be borne by the taxpayer.”
- USDC is currently the fifth-largest cryptocurrency by market capitalization, with a US$38.4 billion market cap.
Forkast.Insights | What does it mean?
The collapse of Silicon Valley Bank was not due to its affiliations with crypto. But combined with the failure of Signature and Silvergate, its collapse has rattled the industry to its core.
When Signature went down, it was revealed that Coinbase and Paxos, the issuer of Binance’s BUSD stablecoin, collectively had around US$500 million deposited in the bank. When Silicon Valley Bank called it a day, USDC issuer Circle had several billion dollars parked there.
Although Circle acted quickly to reassure investors they wouldn’t lose their money, a bigger question arose: Is the crypto industry’s long-term viability reliant on regulators stepping in to clean up its messes?
Since 2008, and before that, if we’re honest, central banks around the world have played a very visible role in backstopping the financial system and the economy more broadly when things have gone sideways. As the Covid pandemic brought much of the world to a halt, their huge injections of liquidity spared it an even worse fate than it ended up suffering. That may have been a rescue that was always guaranteed. Crypto has no such luxury.
Circle may have handled its Silicon Valley problem adroitly, but would Tether fare so well in similar circumstances? Tether appears to be only skimpily regulated in the U.S., yet its market cap is nearly twice that of USDC. If it gets into trouble, there are few people it can turn to for help.
When Terra collapsed last year, no central authority was willing to pick up the bill. If crypto wants to be taken seriously, its “safest” assets must be made safer than they currently are.
2. Gate crash
By the numbers: Silvergate — over 5,000% increase in Google search volume.
California-based, crypto-focused lender Silvergate Bank is being wound up by its parent company, Silvergate Capital, becoming another victim of last year’s collapse of crypto exchange FTX.
- Silvergate Capital will shut down the bank’s operations and liquidate it in an orderly manner, offering full repayments to all depositors, according to a company announcement.
- Unlike the recent failures of Silicon Valley Bank and Signature Bank, Silvergate’s shutdown has not involved intervention by the U.S. Federal Deposit Insurance Corporation.
- As a federally insured bank, Silvergate provided banking services to the crypto industry. In 2017, it rolled out its Silvergate Exchange Network (SEN), a 24/7 payment network allowing instantaneous fiat transactions between crypto exchanges and their customers.
- The bank was hit hard by the collapse of FTX in November 2022, with its non-interest-bearing deposits slumping from US$12.1 billion on Sept. 30 to US$3.9 billion on Dec. 31, a dive of more than 67%, according to a Silvergate quarterly report.
- The crypto market has felt the absence of SEN, which Silvergate said had handled around US$563.3 billion of U.S. dollar transfers last year. On some U.S. crypto exchanges, Bitcoin-to-dollar and Bitcoin-to-Tether transactions dropped between 35% and 45% between the beginning of the month and March 11, Bloomberg reported earlier this week.
- At the same time, U.S.-based crypto exchanges are seeking alternatives for banking services, with Kraken set to launch its own bank in the state of Wyoming, aiming to offer “a more seamless integration between crypto and the traditional financial system”.
- Silvergate’s stock was trading at US$2.21 at press time, down more than 80% from its opening price on March 1, according to data from Yahoo Finance.
Forkast.Insights | What does it mean?
Crypto users could be forgiven for feeling un-banked in the U.S., especially when it comes to 24/7 payments. The loss of Silvergate’s seamless off-ramp has meant crypto companies have been forced to find alternative means of transacting with traditional finance.
A stark illustration of this came in the form of Circle’s weekend announcement that it would cover any losses related to the closure of Silicon Valley Bank, but that investors would have to wait until banks opened on Monday before they could withdraw their funds.
This is a profound development affecting one of crypto’s key features: markets that never close and the ability to cash out anytime. It’s a problem being felt by other companies, too.
Crypto.com and Binance are having to find new off-ramps for the euro and British pound after banking partners pulled out of crypto. While businesses are exploring other options, and new companies gear up to meet their needs, cryptocurrencies look more isolated from the rest of the finance sector.
This is likely to continue as regulators scrutinize the balance sheets of businesses offering services to the industry. It ought to be beneficial for consumers in the long run, but for now, it leaves crypto with fewer friends in TradFi.
3. Regulatory consolidation
China has passed a plan to establish a new national financial regulator, replacing the China Banking and Insurance Regulatory Commission, according to state-run news outlet CGTN. The move was part of an overhaul of State Council institutions announced at the annual “two sessions” meetings of the National People’s Congress and the Chinese People’s Political Consultative Conference last Friday.
- The new regulatory administration will be set up directly under the State Council. Aside from replacing the China Banking and Insurance Regulatory Commission (CBIRC), it will also consolidate certain functions of the People’s Bank of China (PBOC) and the China Securities Regulatory Commission (CSRC). The new regulator’s official name has not yet been revealed.
- Financial regulation in China has up to now been the preserve of the CBIRC, the PBOC and the CSRC, whose functions have at times overlapped. Following the reform, the respective responsibilities of PBOC and CSRC to protect consumers and investors will be shifted to the regulator, which will supervise most of the country’s financial activities, apart from the securities sector.
- The reform will further centralize China’s supervision of its finance sector and comes as part of an overall consolidation of political power in the country.
- “China’s regulatory reforms will strengthen regulators’ capability to establish and enforce a unified regulatory framework, as well as reduce the room for regulatory arbitrage,” CNBC reported Moody’s Investors Service Vice President David Yin as having said in a note.
- The reform plan follows President Xi Jinping’s warning in February about three “systemic risks” in China’s economy: risks to the real estate sector, financial risks and local government debt risks.
- The plan does not give much indication of how crypto assets will be regulated. According to a PBOC notice dated September 2021 that announced China’s blanket ban on cryptocurrency transactions, the CBIRC, the PBOC and the CSRC were together responsible for curbing crypto speculation to safeguard financial stability.
Forkast.Insights | What does it mean?
Beijing’s announcement of a new financial regulator shows the extent to which it is poised to charge ahead with its Digital China strategy while ramping up efforts to identify and weed out perceived risks to the country’s financial system.
When China banned cryptocurrency transactions in 2021, 10 regulators — including the China Banking and Insurance Regulatory Commission, the People’s Bank of China and the China Securities Regulatory Commission — pointed to crypto as a risk and announced a ban in a joint notice. There have been some overlaps in oversight responsibilities among the three authorities, but now, with the establishment of the new regulator, currently informally known as “the National Financial Regulatory Administration,” the reshuffle is expected to clarify regulatory power and functions.
According to analysts at Citic Securities and Guotai Junan Securities, cited in a report by business media outlet Caixin Global, the top-level realignment aims to spell out the regulatory relationship between monetary policy and financial consumer protection.
When it comes to consumer protection, the State Administration for Market Regulation (SAMR) on Tuesday released a report showing a growing number of complaints associated with non-fungible tokens (NFTs). Last year, NFT buyers in China flooded SAMR with gripes about scams and price manipulation, with official complaints skyrocketing 30,000% to 59,700 from just 198 the previous year.
Meanwhile, China appears determined to develop and oversee the industries contributing to its digital economy by setting up a national data bureau. That makes sense, as a big chunk of the nation’s economy depends on its digital industries. A government “work report” submitted on March 5 to the country’s rubber-stamp legislature showed that the value-added output of new industries and businesses in the country’s digital economy accounted for more than 17% of gross domestic product.
It remains to be seen how the new financial regulator will approach NFTs, which in China have frequently involved fraud and wild speculation, and how it and other authorities will strike a balance between encouraging digital innovation and ramped-up regulatory scrutiny. But what’s more certain following the heavily politically loaded meetings that wrapped up a few days ago is that however China’s digital future takes shape, it may well look even more centralized under the Communist Party’s control than it already is.