Circle’s USDC bounces back after Silicon Valley Bank bust

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

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. 

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. 

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.