The fall of three major U.S. banks forces us to analyze the reasons for the events, the impact on the crypto-economy, and other possible consequences so that we are alert to what is coming.
On Wednesday, March 8, 2023, Silvergate Capital went out of business. On Friday, March 10, Silicon Valley Bank collapsed, causing a huge shock to the U.S. financial sector. A third bank, Signature Bank of New York, also went bankrupt on Sunday.
Over the weekend of March 10, global news headlines talked about the collapse of Silicon Valley Bank (SVB), a California bank focused on the tech sector, targeting entrepreneurial, unlisted startups.
But it was the second bank to fail this week, as another central bank lending to the crypto industry, Silvergate Capital, went out of business on Wednesday. This event only caused concern and gripped the world when SVB collapsed on Friday, announcing that it needed to raise $2 billion to shore up its balance sheet, news that prompted its customers to withdraw more than $42 billion from their deposits. The FDIC (Federal Deposit Insurance Corporation, an acronym in English) stepped in and seized assets as a result of the sharp decline of the 16th largest bank in the United States.
On Sunday, another bank called Signature Bank in New York also collapsed, and the FDIC stepped in. This marked the economic scenario of the week with the prominence of three banks known for being crypto-friendly, closing operations in less than seven days and affecting the economy in different ways.
And while some want to blame cryptocurrencies for this collapse, the truth is that the cause was what some call a perfect storm, and I’ll go point by point:
- The United States federal government’s raising of interest rates to combat inflation was an important circumstantial precedent.
- Bad financial decisions , as in the case of SVB, which used deposits from its customers to buy long-term bonds and consequently with interest rates that over time were lower than those set by the federal government for bonds Similarly.
- Poor communication by the management team with their clients, who did not offer context or solutions until one day after the announcement, increasing uncertainty and panic.
- A falling market in the technology sector , which has required more cash withdrawals over the past year due to a lack of funding rounds and increasingly difficult bank liquidity.
- And, as a result, a raid on banks or mass withdrawals of deposits due to the general panic that exacerbated the crisis we have all witnessed.
But what impact does this have on the crypto economy?
Without a doubt, it was the fall of SVB that had a strong impact on the cryptocurrency market, as several companies in the ecosystem had funds in SVB. Circle, which issues the stable USDC coin , was hit hard because it had over $3 billion in SVB. This caused USDC to lose its peg to the dollar. Another stable coin that has also lost parity is DAI, as 37% of its collateral is in USDC. An estimated $70 billion worth of crypto assets were lost over the weekend of March 10. This was quickly suppressed when the U.S. Treasury, the Central Bank and the FDIC announced on Sunday that everyone who made deposits at SVB and Signature Bank will have access to their funds.
In the short term, government intervention helped. For example, the cryptocurrency market rose quickly, but it will take days or weeks to see the long-term effects. Stablecoins will need to be closely monitored and whether they stabilize.
In fact, the tech startups, customers of these banks, will suffer the most right now, because although in concept the federal government only insures funds up to $250,000, in the end the Joe Biden administration announced that everyone will receive their funds in full. But while they had access to those funds, the truth is that they would have to open accounts at other banks and necessarily change processes to make payments on time. Not to mention the fact that organizations like SVB have been known to support these companies, taking risks that other banks have been unwilling and will not take. Ironically, the tech entrepreneurs, in a panic to save their money, lost just as much as the bank that trusted them the most.
But there is something else that no one is talking about and that I think is very important to think about, and that is that we must remember that Bitcoin was born in response to the financial crisis of 2008, with the first mention of Bitcoin coming two months after Lehman Bank, one of the largest banks in history, collapsed. For Satoshi, the main features of the system would be electronic financial transactions between nodes without having to send them to a financial institution.
The fall of these three banks is due to more complex factors than having tech startups as customers and participating in the crypto-economy, so these events may well reinforce the discontent that prompted Satoshi to develop the idea of a decentralized crypto-economy, which has its roots in the repeated cases where banks undermined the trust of people who invested in them by lending those resources as credit bubbles and leaving very little in reserve.