USDC stablecoin bounces back after Silicon Valley Bank bust

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In this issue

  1. USDC: Lev­el-peg­ging
  2. Sil­ver­gate: Clos­ing act
  3. Chi­na finance: Reverse decentralization

From the Editor’s Desk

Dear Read­er,

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,

Ang­ie Lau,
Founder and Edi­tor-in-Chief
Forkast


1. Stable genus

USDC
Circle’s USDC sta­ble­coin lost its peg to the U.S. dol­lar fol­low­ing news of Sil­i­con Val­ley Bank’s fail­ure, but it rapid­ly returned to near-par­i­ty as a new week began. Image: Canva

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

Silvergate
The clo­sure of the Sil­ver­gate Exchange Net­work, which han­dled a sig­nif­i­cant vol­ume of cryp­to-to-fiat trade, has reduced liq­uid­i­ty in the mar­ket. Image: Silvergate/Canva

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

Regulatory consolidation
Beijing’s announce­ment of a new finan­cial reg­u­la­tor will con­sol­i­date pow­er in the sec­tor under the Com­mu­nist Party’s exec­u­tive branch. Image: Canva

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.



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