What Happened to the Crypto Market After a Bank Failed?
On March 10, 2023, U.S. regulators seized the assets of Silicon Valley Bank. Prior to this, Silicon Valley Bank depositors began to experience large-scale runs due to concerns about the bank's financial situation. Financial regulators around the world are racing to take steps to mitigate the fallout from the collapse of a Silicon Valley bank aimed at bolstering confidence in the global financial system.Extranet News Commentary: This is the largest bank failure in the United States since 2008.
Silicon Valley Bank (SVB) has a broad presence in the tech sector, is well-connected among Silicon Valley's elite, and is known for backing start-ups that large institutions may deem too risky to lend to. Two days after Silicon Valley Bank collapsed, U.S. regulators froze the assets of Signature Bank. Signature Bank, based in New York and known for its work in the cryptocurrency space, is also the third largest bank to fail in U.S. history.
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The Fed steps in to turn the tide
US regulators announced on Sunday that they would guarantee all deposits at the two banks. The Fed also unveiled a new Bank Term Funding Program (BTFP), designed to boost confidence in the financial system by giving banks the option to borrow directly from the Fed to avoid being forced into loss-making bond sales.
The Federal Deposit Insurance Corporation (FDIC) transferred all SVB deposits (including uninsured deposits) and virtually all assets held in Deposit Insurance National Bank (DINB, created by the FDIC) to Bridge Bank. The most direct impact is that on March 13, depositors can already withdraw all their deposits in Silicon Valley Bank at the transitional bank. So far, the Federal Reserve has taken action to cover Silicon Valley Bank and the signatory banks and stabilize the shock.
Will the Fed's actions affect the movement of this crypto market and the sentiment of investors?Some believe that the Federal Reserve’s rescue of state-owned banks can boost market confidence and benefit the encryption industry; however, some believe that the Federal Reserve has excessively helped traditional financial institutions, thereby reducing the market’s enthusiasm for decentralized finance in the encryption industry .
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behind the rescue
Teacher Mindao’s statement that “the Federal Reserve rescues Silicon Valley Bank” is open to question, and cannot be understood as a bailout of Silicon Valley Bank. "Bailout: (Usually refers to economically) helping (someone or an institution) out of trouble." Whether it is from the official caliber or from the information disclosure of authoritative media, the context reflected and the official situation of the last financial crisis Attitudes make a difference. Behind the "rescue" is not an unconditional and bottomless comprehensive cover, but the maintenance of the stability of the entire market and the protection of depositors' assets.
'Save' markets and savers, not a bank
Mr. Xiaosong pointed out that the Fed’s rescue action is also to avoid greater systemic risks. Under the market downturn, the authorities took timely measures to not only protect the assets of depositors, but also maintain the stability of the financial market to prevent the impact of this incident. The domino effect of the entire financial market. Mr. Loki also agrees that the Fed's move can boost market confidence at the same time.
'Bailout' rate policy, not a bank
From the perspective of the fundamental origin of the bankruptcy of Silicon Valley Bank, it is caused by the internal cause of the misallocation of its own assets and the external factors such as the Fed's interest rate hike. The Fed's "rescue" is also a "self-rescue" for risk management and control of its own policies.
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Where does the shock in the encryption market come from?
As soon as the Silicon Valley Bank incident broke out, the biggest shock to the encryption market came from the sharp drop of Stable Coin USDC. Its decline is very rare for Stable Coin, which is the most direct reaction of the encryption market to this incident.
Teacher Adam explained to us the connection between Silicon Valley Bank and the encryption industry - Silicon Valley Bank is not like a signatory bank, and it is not directly related to Web3. In other words, Silicon Valley Bank is not a cryptocurrency bank, it is an innovative digital bank that serves unicorns and innovative companies. Although the fields it serves include the encryption industry and Internet technology, there are also other enterprises such as biomedicine.
Teacher Xiaosong also directly pointed out that Silicon Valley Bank is a Crypto-friendly bank, but it has no direct relationship with encryption companies. The USDC shock this time is due to the fact that Silicon Valley Bank is one of the six bank partners of Circle, the issuer of USDC. Circle stores about 40 billion USDC cash reserves in these six banks, and about 3.3 billion US dollars are placed in Silicon Valley Bank. . Although Circle officially stated that while waiting for how the FDIC's takeover of Silicon Valley Bank will affect its depositors, it will ensure that Circle and USDC will continue to operate normally, but the confidence of crypto users still rebounded with the price after the Fed's move.
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Crypto Apocalypse: Decentralized assets rely on centralized crypto banks
Looking back at the whole incident, it was a false alarm for bank depositors and USDC holders, and there was no actual loss of personal assets; for the entire encryption market, it showed a recovery within three days. But will the decentralized world pursued by encryption enthusiasts and Web3 pioneer developers rely so much on the stability and liquidity of highly centralized banks/institutions, will it bring potential to a truly decentralized encryption market? What about the risk?
Mr. Loki clearly pointed out that this matter in the market has brought doubts to the encryption industry: when cryptocurrencies are different from centralized assets and emphasize decentralization and trust, so that users who do not trust centralized banks have a consensus and consensus, but When banks can directly influence cryptocurrencies? How will user trust continue? How will the situation of the encryption market develop?
Stable Coin Category
Mr. Adam proposed to analyze from different types of Stable Coin. Stable Coin can be divided into three main types, namely, Stable Coin collateralized by fiat currency, Stable Coin collateralized by cryptocurrency, and Stable Coin without low deposit.
The Stable Coin, which is collateralized by fiat currency, is pegged to the U.S. dollar one-to-one. When the U.S. dollar is used as the unit of measurement, the value of the collateral does not have any risk of fluctuation; Security for redeeming tokens, collateral costs.
Stable Coin with cryptocurrency as collateral, decentralized debt issuance, backed by cryptocurrency and or multiple assets, with collateral, using cryptocurrency as over-collateralization. In this model, the collateral backing the Stable Coin is itself a decentralized encrypted asset. Its limitation lies in the volatility of the collateral, and it has little resistance to black swan events (such as the collapse of the Silicon Valley bank), requiring excess collateral.
Stable Coin without low stakes: seigniorage shares/decentralized banking/algorithmic stabilization mechanism. It stabilizes the supply of coins by algorithmically expanding and contracting prices, much like central banks do with fiat currencies. Its limitations are that stability is often maintained by centralized mechanisms, monetary policy remains complex, unclear, unproven, and incentives may be insufficient. Most of these projects are highly volatile, with prices falling.
We can see that the collapse of Silicon Valley Bank has a very direct impact on the centralized Stable Coin, which is its inherent risk. For the algorithm Stable Coin, there will be no obvious market fluctuations.
How Stable Coin avoids risks, listen to what experts say
Mr. Bruce suggested that we need a more decentralized Stable Coin solution. Teacher Adam said that for the central Stable Coin, it is necessary to promote its own credibility and security through asset transparency and asset reserves; for the algorithm Stable Coin, a good business model can better avoid liquidity risks or death spiral risks , and a considerable size are the prerequisites for good market risk control.
Teacher Xiaosong put forward his vision and vision for the future. From the point of view of the issuing bank, whether there will be a licensed digital bank in the future, which can not only achieve legal and compliant supervision, but also make Stable Coin more stable through the openness and transparency of data on the chain. "Stablize".
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Web2 to Web3, still takes time
The jump from Web2 to a fully Web3 world is not a one-day process, and during the transition from Web2 to Web3, we need a "Web5" (Web2 + Web3) response. As Mr. Xiaosong said, during this period, the encryption market needs to embrace regulation in order to achieve the ideal credibility and transparency.
From centralization to decentralization, it still takes time.
