With over $200 billion in assets, Silicon Valley Bank (SVB) provided a lifeline for cryptocurrency businesses.
Significantly, it was one of the only organizations in the country providing services to crypto firms at a time when other banks avoided the market out of concern for risk and the potential for an abrupt governmental crackdown. While the business are experiencing losses, you CAN WIN! Check out the best crypto casinos of march 2023!
The sudden failure of SVB, Signature Bank, and Silvergate Bank has raised concerns about the possibility of another financial catastrophe similar to the one that occurred in 2008. The bank run caused panic in U.S. markets even as authorities continue to reassure the public that they are working on a recovery plan and the Biden administration announced steps to safeguard depositors.
When the majority of customers at a specific bank choose to withdraw their money all at once, it is known as a bank run. As banks are only required to keep a portion of client deposits at any given moment under the fractional reserve banking system, the majority of banks do not have all of their depositors’ money on hand.
The system has been effective for a while, but around once every ten years, a bank run occurs, exposing the weakness of the financial system.
While being usual in most conditions for banks, the sudden fall in deposits made the asset-to-liability mismatch unacceptable in the current context.
Due to a number of high-profile crashes and investor losses, the crypto business has recently been under heavy fire. Yet, in the instance of SVB, cryptocurrency’s involvement was less causal and more because stablecoin issuer Circle took a counter-party risk.
Following SVB’s demise on March 10, USD Coin issuer Circle revealed that SVB held almost $3.3 billion of the reserves underpinning USDC.
The stablecoin suffered significantly as a result of the news; it was no longer pegged to the dollar and finally dropped below $0.87. Due to the stablecoin’s popularity in both centralized and decentralized ecosystems and its second-largest market share, the de-pegging of USDC sent shockwaves across the cryptocurrency community.
Despite Circle’s assurances that they will make up the difference with other assets, traders and whales began to exchange USDC for other stablecoins that were readily accessible, even at a loss.
For $2 million worth of USDC, one terrified trader who tried a hazardous and ultimately expensive maneuver to exit it earned just $0.05 in Tether.
In contrast, individuals who continued to believe that USDC would eventually regain its peg began purchasing USDC at a discount in the expectation of profiting when the price rose back to $1.00.