The global crypto market has been finding itself in troubled waters for nearly a year now. From the massive LUNA collapse that wiped out billions of investors’ money in May 2022, to the mismanagement of funds by former FTX CEO Sam Bankman-Fried (which eventually led to the collapse of the crypto lender) later in the year, the crypto market is facing an unprecedented meltdown, which is further intensified by the recent closures of three US-based crypto-friendly banks — Silvergate Capital Corp., SVB Financial Group’s Silicon Valley Bank, and Signature Bank.
What Happened To The Banks?
As one of the many market repercussions of the FTX collapse, the crypto-friendly Silvergate Bank reported losses of $1 billion in the last quarter of 2022, as FTX was one of the bank’s biggest clients. As a result, on March 8, Silvergate announced that it will wind down operations and voluntarily liquidate the bank. “In light of recent industry and regulatory developments, Silvergate believes that an orderly wind-down of Bank operations and a voluntary liquidation of the Bank is the best path forward,” the bank said in a statement.
The bank also added that the bank’s wind-down and liquidation plan includes “full repayment of all deposits.” Silvergate said that it is also considering how best to resolve claims and preserve the residual value of its assets, including its proprietary technology and tax assets.
Silicon Valley Bank, which primarily served the needs of tech startups, was last week placed into Federal Deposit Insurance Corp. receivership as a result of notable venture capitalists telling customers to pull their deposits out. For those unaware, when an insolvent company is placed in receivership, it is offered an opportunity to resume business operations and recover.
While a bailout of Silicon Valley Bank is not on the cards, as stated by US Treasury Secretary Janet Yellen, President Joe Biden said that the government is “firmly committed” to holding those responsible for the “mess”. The government assured that all depositors will be able to access all their money.
Lastly, on Sunday, US state financial regulators noted that New York-based Signature Bank has also failed and was being put under seizure. Depositors will have access to their money in this case as well, the government clarified.
How The Banks’ Closures Are Affecting Crypto Trade
As of March 8, Signature Bank held $16.5 billion in crypto deposits, as reported by Bloomberg. Additionally, Circle Internet Financial Corp., the noted digital asset firm which is one of the major issuers of stablecoin USD Coin (USDC), revealed that it had reserves worth $3.3 billion with the bank. As a result, the USDC stablecoin, which is generally known for its stability, lost its US dollar peg, creating panic among investors.
It should be noted that back in May last year, it was the depegging of stablecoin UST that led to the crash of its linked crypto, LUNA. The crash wiped out billions from the global crypto market, bringing down prices of leading crypto coins such as Bitcoin (BTC) from around $65,000 down to $18,000 nearly overnight — a situation from which BTC and other crypto prices are yet to recover from.
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So, it doesn’t come as a surprise that the depegging of USDC is sending waves of panic among crypto investors across the globe.
However, it is the impact the latest bank closures are having on instant money transfers that appear to be of the biggest concerns for global crypto players.
Advantages Of Instant Money Exchange Networks
When cryptocurrency and related networks were in their nascent stages, crypto firms and investors had to find their way through costly, time-consuming processes to transfer money between banks for crypto purchases or sales. Traditional banking channels would take a lot of time (often days) to complete a transaction, and by the time a transaction would eventually be completed, the market price stood a chance to move in a completely different direction, resulting in losses for investors more often than not. Additionally, traditional banks will remain closed on weekends, whereas crypto would trade 24x7.
As a solution, in 2017, Silvergate brought forward the Silvergate Exchange Network (SEN), which allowed a seamless transfer of funds almost instantaneously. The best part? Usage of SEN is free and is generally considered to be safe.
As per Silvergate’s Q422 data, as reported by Bloomberg, SEN handled $563.3 billion of US dollar transfers in 2022, down from $787.4 billion in 2021.
SEN’s main US challenger was managed by Signature Bank. Dubbed Signet, it enabled commercial crypto clients to make real-time payments in dollars, anytime clients want. After the shutdown of Silvergate's SEN network, Signet was the only option for many crypto clients seeking to make fast payments to exchanges and vendors or meet payroll. Crypto derivatives platform LedgerX had previously instructed clients to send domestic wire transfers to Signature instead of Silvergate.
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USDC issuer Circle had $3.3 billion at Silicon Valley Bank and held transaction and settlement accounts for USDC at Signature. Coinbase, the largest crypto exchange in the US, integrated Signet to allow clients to transfer funds instantaneously last October. In 2021, stablecoin TrueUSD integrated with Signet for instant settlements, and Signet also integrated with Fireblocks in 2020.
With Signet now out of commission, users may face difficulties in quickly moving funds in and out of exchanges, causing a significant impact on crypto-market liquidity. The ease of trade for Bitcoin-to-dollar and Bitcoin-to-Tether transactions on some US exchanges has already dropped between 35 percent and 45 percent from the beginning of March to Saturday, according to Kaiko research data cited by Bloomberg.
The closure of Signature Bank is likely to exacerbate this situation.
What Investors Should Keep In Mind Under Current Conditions
At the time of writing, the global crypto market cap stood at $1.02 trillion, as per CoinMarketCap. Recovering from around $980 billion over the weekend, the global market is yet to signs of a crash. However, given that the crypto market runs more on investors’ sentiment than anything else, it can be speculated that the banks’ closures might lead to an increased sell-off in the market.
The latest developments may have both short- and long-term impacts on the market, including a rise in volatility and consolidation, as per Mudrex co-founder and CEO, Edul Patel.
“Since the US government stepped in, there should not be any impact on the depositors. These types of events may lead to more regulatory scrutiny and clarity around the crypto industry in the future,” Patel told ABP Live. “As the industry is still in its early stages, investors should conduct thorough research and diversify their portfolios to mitigate risks. It's crucial to monitor regulatory changes closely and analyse market trends to make informed investment decisions.”
For now, the uncertainty around the bank shutdowns may worsen credit conditions, WazirX Vice President Rajagopal Menon said. “The crypto sector will be closely watching the development, particularly with regard to stablecoins,” Menon said.
He went on to advise investors to “always do your own research and make an informed decision.” “Diversification is important. While Warren Buffett prefers concentrated diversification, holding only 30 or 40 companies, it is important to have a minimum of 8 to 10 stocks in your portfolio, with no stock accounting for more than 10 per cent of your portfolio value,” Menon added.
Disclaimer: Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. Cryptocurrency is not a legal tender and is subject to market risks. Readers are advised to seek expert advice and read offer document(s) along with related important literature on the subject carefully before making any kind of investment whatsoever. Cryptocurrency market predictions are speculative and any investment made shall be at the sole cost and risk of the readers.