The collapse of Silicon Valley Bank on Friday, March 10, threatened to leave many startups in a perilous financial position. But few had more at stake than Circle Internet Financial Ltd., the venture-capital-backed crypto company whose role in the digital ecosystem was as an issuer of the most trusted stablecoin, USD Coin, or USDC.
Stablecoins are akin to poker chips that can be used to buy and sell crypto. Because they were originally 100 percent backed by dollar equivalents like Treasury bills, they could trade at parity with the dollar. The problem for Circle: $3.3 billion of its cash reserves were stuck in an account at SVB, which had just been seized by the Federal Deposit Insurance Corp. The lack of cash led USDC to lose its peg to the dollar, and by the next morning — a Saturday — it traded as low as 87 cents.
Circle’s banking problems didn’t start or end with SVB. The stablecoin issuer also had previously banked at California-based Silvergate Bank and New York-based Signature Bank — two banks whose internal blockchain trading networks had facilitated the crypto boom. Both banks are now gone, as are their trading networks. A significant portion of the assets of Signature, also seized by the FDIC, was bought by New York Community Bank, but its remaining $4 billion in crypto assets were not part of the deal. Silvergate is winding down operations, and it and Signature are under investigation by the U.S. Department of Justice and other authorities, suspected of facilitating money laundering amid a lack of proper oversight.
The demise of these three banks cut off the crypto world’s predominant access to the U.S. banking system, leaving investors shaken. Almost immediately, Bitcoin slipped below the $20,000 floor it had established after falling over the past year following a cascade of debacles: the demise of stablecoin issuer Terraform Labs, the liquidation of crypto hedge fund Three Arrows Capital, the high-profile bankruptcies of Voyager Digital and Celsius Network, and finally the ignominious end to Sam Bankman-Fried’s allegedly fraudulent FTX crypto empire.
But despite all these headwinds, something strange happened. Bitcoin began to rally. It’s now up 35 percent since the SVB collapse, and the crypto faithful say it’s just more proof that the lack of trust in government institutions that led to Bitcoin’s birth following the 2008 financial crisis is alive and well.
“Bitcoin is a report card on monetary policy and financial stability. In other words, it was built for these times,” Mike Novogratz, CEO of crypto firm Galaxy Digital and one of crypto’s most influential boosters, tweeted on March 23. “On a risk-adjusted basis, [Bitcoin] is the best-performing asset of the year, outpacing growth stocks, banks, and major stock benchmarks.” (Bitcoin is still down more than 50 percent from its peak in November 2021.)
Novogratz later called the banking crisis “an adrenaline shot” for crypto.
That crisis clearly has been a boost to the Bitcoin bulls. “The story right now is banks are in trouble,” explains Molly White, a fellow at the Harvard Library Innovation Lab who is researching cryptocurrencies and the blockchain. Other U.S. banks have been looking vulnerable, as have European banks following the Swiss-government-backed rescue of Credit Suisse by UBS. For the Bitcoin “maximalists” — those who White says believe the banking system is near collapse and hyperinflation is coming — “the way to protect yourself is by buying Bitcoin; taking your savings account, withdrawing that cash, using it to buy Bitcoin, and that will protect you.” It is the same narrative that propelled Bitcoin in the first place — despite there being no evidence to support it, she says.
In fact, much of the evidence points to something more nefarious. “It’s pretty much uncontroversial that some crypto trading is manipulated,” says White, who was named one of crypto’s most influential people by CoinDesk in 2022. “The question really is just how much.”
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