Signature, SVB, Silvergate Failures: Effects on the Crypto Sector

Two of the banks friendliest to the crypto sector and the largest bank to tech startups all went bankrupt in less than a week. As cryptocurrency prices surged Sunday night after the federal government stepped in to provide a backstop for depositors at two of the banks, the events created instability in the stablecoin market.

Silvergate Capital, a central lender to the crypto industry, said Wednesday it would wind down operations and liquidate its bank. Silicon Valley Bank, a major lender to startups, collapsed Friday after depositors took out more than $42 billion following the bank’s Wednesday statement that it needed to raise $2.25 billion to strengthen its balance sheet. Signature, which also had a strong crypto focus but was much larger than Silvergate, was seized by banking regulators on Sunday night.

Signature and Silvergate were the top two banks for crypto companies, and nearly half of all US venture capital-backed startups held cash at Silicon Valley Bank, including crypto-friendly venture capital funds and some digital asset firms.

The federal government stepped in on Sunday to guarantee all deposits for SVB and Signature depositors, boosting confidence and sparking a small rally in the crypto markets. Both bitcoin and ether are up nearly 10% in the past 24 hours.

Nic Carter of Castle Island Ventures said the government’s willingness to support both banks means it is back providing liquidity rather than tightening.

But the instability once again showed the fragility of stablecoins, a subset of the crypto ecosystem that investors can typically rely on to maintain a fixed price. Stablecoins are supposed to be pegged to the value of a real asset, such as a fiat currency like the US dollar or a commodity like gold. But unusual financial conditions can cause them to fall below their pegged value.

Many crypto problems in the past year have originated in the stablecoin sector, starting with the collapse of TerraUSD last May. Meanwhile, regulators have focused on stablecoins in recent weeks. Binance’s dollar-pegged stablecoin, BUSD, saw massive outflows after New York regulators and the Securities and Exchange Commission put pressure on the issuer, Paxos.

Over the weekend, confidence in this sector took another blow as USDC – the second most liquid stablecoin pegged to the US dollar – lost its peg, dropping below 87 cents at one point on Saturday after its issuer, Circle, admitted having banked $3.3 billion with SVB. Within the digital asset ecosystem, Circle has long been considered one of the adults in the room, with close ties and support from the world of traditional finance. It raised $850 million from investors like BlackRock and Fidelity and had long said it planned to go public.

DAI, another popular dollar-pegged virtual currency backed in part by USDC, traded for just 90 cents on Saturday. Both Coinbase and Binance have temporarily paused the USDC to dollar conversion.

On Saturday, some merchants began to barter their USDC and DAI for tether, the world’s largest stablecoin with a market cap of over $72 billion. Tether’s issuing company had zero exposure to SVB and it is currently trading above its $1 peg as traders flock to safer pastures, even as Tether’s business practices have been called into question, as has the state of its reserves.

The stablecoin market began to recover on Sunday night after Circle published a blog post stating that it would “cover any shortfall with company funds.” Both USDC and DAI have since moved back to their dollar pegs.

Now that it’s clear that SVB depositors will be made healthy, Carter tells CNBC he expects USDC to trade at par.

In the long run, the closure of the cryptobank trifecta could spell trouble for bitcoin, the world’s largest cryptocurrency, with a market cap of $422 billion.

The Silvergate Exchange Network (SEN) and Signature’s Signet were real-time payment platforms that viewed crypto customers as core offerings. Both enabled commercial customers to make payments 24 hours a day, seven days a week through their respective instant settlement services.

“Bitcoin liquidity and crypto liquidity in general will be somewhat compromised as Signet and SEN were key for companies to land fiat over the weekend,” said Carter, adding that he hopes client banks will step in to fill the void to fill left by SEN. and Signet.

“These were the two most bitcoin-friendly banks, supporting the lion’s share of fiat settlement for bitcoin transactions between trading counterparties in the US,” Mike Brock wrote in a post on social media app Damus. Brock is the CEO of TBD at Block, a unit focused on cryptocurrency and decentralized finance.

While Carter thinks the Fed is stepping in to guarantee SVB depositors will avoid a bigger bank run on Monday, he says it’s still disheartening to see the top three crypto-friendly banks taken offline within days.

“There are very few options for crypto companies right now and the industry will be tight for liquidity until new banks step in,” Carter said.

Mike Bucella, a longtime investor and executive in the crypto space, says many in the industry are turning to Mercury and Axos, two other banks that focus on startups. Meanwhile, Circle has already said publicly that it is shifting its assets to BNY Mellon as Signature bank closes.

“In the short term, crypto banking in North America is a tough place,” said Bucella. “However, there is a long tail of challenger banks that can take that slack.”