The past few days were Chaotic.
I know it’s bad when I’m F5’ing Coingecko on a Saturday night. I haven’t felt this kind of negative energy since FTX collapsed.
We wanted to write a special edition newsletter to catch you up on everything (Don’t worry, we’ll send out our usual newsletter on Thursday too.)
So much has happened in the past few days.
- Several major banks shut down. Silicon Valley Bank financed many Crypto startups and VCs. Silvergate & Signature were the 2 most Crypto friendly banks, and they’ve shut down.
- USDC depegged. USDC, one of the most trusted stablecoins, dipped to $.88. (It has since recovered)
- Other stablecoins depeg. Once UDSC started depegging, other stablecoins started to depeg too.
Let’s get into it!
Silicon Valley Bank Collapses
Silicon Valley Bank (SVB) was the 16th largest bank in America. SVB financed around 40% of venture-backed startups. This was the 2nd largest bank collapse in US history. It collapsed in a span of 48 hours.
Since 2020, customers’ money deposited in SVB has seen a meteoric rise. Bank deposits increased from $62 billion in March 2020 to $124 billion in March 2021.
The bank used these funds to buy long-term treasury bonds. This turned out to be a big mistake.
These long-term securities lost most of their value due to rising interest rates. The unrealized losses for these investments were said to be around $15 billion.
To make matters worse, startups started withdrawing funds much faster than SVB could handle. The bank had to sell some of its long-term securities to give them cash. This resulted in a $1.8 billion loss.
On March 8, 2023, SVB announced it had sold over $21 billion worth of its investments, borrowed $15 billion, and would hold an emergency sale of its stock to raise $2.25 billion. Moody’s, the credit rating agency, downgraded SVB’s rating the same day.
Panic settled in. This was the beginning of a bank run.
VCs asked their portfolio companies to pull out funds from SVB. Tech Twitter quickly learned about this. Before you knew it, mass hysteria had spread through group chats.
By the end of March 9, customers had withdrawn $42 billion, resulting in a negative cash balance. SVB’s shares plummeted, and trading was eventually halted.
The FDIC took over SVB on March 10.
Regarding assets, this was the second-largest failure of an FDIC-insured bank.
The Domino Effect
The collapse poses no systemic threat to the U.S. financial system, but it has created hardships for many tech startups. So what does this have to do with Crypto?
Circle is the issuer of $USDC. Remember, USDC is the 2nd largest stablecoin on the market after Tether.
According to their latest audit, Circle held around $8.6 billion in American banks. They remained tight-lipped on March 10, the day SVB collapsed. This silence was enough to get the rumor mill started.
On March 11, Circle confirmed it had $3.3 billion in SVB Bank.
The crypto world was already suffering from an acute post-UST traumatic disorder. After the announcement, $USDC lost its peg. It dropped as low as $0.8774.
There were other factors too:
- Coinbase paused USDC:USD conversions.
- Coinbase cited weekend bank closures as the reason. Converting large amounts of USDC depended on banks, which shut during the weekend.
- Binance also stopped auto-conversions of USDC to BUSD.
There was also some game theory at play. Once USDC started depegging, people started having flashbacks of Terra’s $UST collapsing. Remember, $UST eventually went to $0.
USDC didn’t have the same risks because of the assets backing it. People were also betting on whether the Fed would step in to save depositors for SVB.
Other Stablecoins Feel the Pain
It wasn’t just $USDC that depegged. The so-called “decentralized” stablecoins, $DAI & $FRAX, also depegged.
The reason for their depegging is straightforward. Both of them are partially backed by $USDC. So when $USDC went off the rails, people panicked. They thought these “decentralized stablecoins” weren’t fully backed anymore.
This over-reliance on $USDC has been a known issue for a long time. MakerDAO currently has over $3.1 billion worth of $USDC collateral backing $DAI. However, we’re nowhere near solving this problem.
People started fleeing to USDT (Tether) as a safe haven for stablecoins. Ironic since Tether has been one of the most controversial stablecoins.
The Regulators have Arrived
On March 12, the Treasury, Federal Reserve, and FDIC announced that all depositors would be made whole without the expenditure of taxpayer money.
This was a godsend for $USDC. This meant that their $3.3 billion USD was safe. They were once again fully backed.
Since the banks were closed on Sunday, the $USDC didn’t reach its dollar peg immediately. It was restored only on Monday. $DAI & $FRAX also regained their peg.
However, regulators also brought bad news.
Signature Bank Shuts Down
This was another crypto-friendly bank.
The New York State Department of Financial Services closed the bank on Sunday. Few details are available as to why Signature Bank was closed.
The Federal Reserve and FDIC claimed there was a systemic risk.
In today’s world, operating a crypto company requires banking services. So, we need better and more diversified banking partners.
Several banks have stepped up worldwide, including Santander, HSBC, Deutsche Bank, Mercury, and more. But it will be difficult for companies trying to bank in the US.
Second, we need a TradFi counterpart to settle transactions 24×7 to match crypto hours—part of the reason $USDC was depegged was that the banks were closed on weekends.
Recently, regulators have been hostile to Crypto. In the last week, the top three crypto-friendly banks were shut down.
The crypto community is suspicious.
Silvergate is still solvent, despite an unprecedented 90 day $12 billion liquidation sparked by a corrupt sitting Senator who coordinated a bank run w/ short sellers.
Signature was healthy. NYDFS went rogue in shutting them down, and surprised even the FDIC.
It’s targeted.— Ryan Selkis 🥷 (@twobitidiot) March 13, 2023
A hostile regime won’t do us any good. Addressing policymakers should be a top priority for the community. Law-abiding citizens cannot use Crypto if it is illegal.
None of these bank collapses were due to crypto-rails. People like Balaji argue that this is just a symptom of a larger problem in banking.
In fact, we can argue that Crypto is the solution. In DeFi, we’re building an alternative financial system. Even if it’s a distant dream, let’s keep BUIDLing.
A Few Lessons
- Dai and Frax are trying to become decentralized assets but are partially backed by a centralized collateral (USDC). We can see what a risk this is.
- Diversify your stablecoins. I don’t feel 100% safe with any stablecoins at the mom.
- There are so many idiots around spreading FUD over the weekend. Remember, some people intentionally spread information because they’re trying to short. Others are purely using these events as a way to get eyeballs to their accounts (and shill referral links later). It’s important to step back and understand the facts for yourself.