🐻 The great bank failure

Hey friends. How is everyone doing on this fine Monday? We hope you all got enough rest between losing sleep from Spring daylight saving and the major bank crisis. If you were actually out enjoying your weekend and missed what just happened with the banking system, we’re going to recap everything you need to know and how it impacts your crypto.

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In this issue:

📣The big story of the week. Centralized banks are failing, what does it mean? Bitcoin to the moon.

🚀In other news: KuCoin exchange is getting sued, LEGO is entering into the metaverse and Meta is building a decentralized Twitter. 

📣The big story of the week

Centralized banks are failing, what does it mean?

In the past few months, we saw a number of centralized systemic failures within the financial industry. FTX, Silvergate and now Silicon Valley Bank have all collapsed at the helm of rising interest rates. It’s a widespread contagion of centralized bank failures with more banks and businesses potentially on their way down.

Let’s not beat around the bush and get straight into what in the bloody hell happened.

How Silicon Valley Bank went under

On Friday, Silicon Valley Bank (SVB), the 16th largest bank in the US with over $212 billion in assets was forced to shut down by the US regulators and had its customer deposits seized by the Federal Deposit Insurance Corporation (FDIC).

Nothing is too big to fail. So what happened?

Let’s go back to the year of 2020/21. SVB was riding a high as the bank of choice for several US startups. In fact, nearly half of US startups were banking with SVB. Needless to say, the bank was raking in the customer deposit dough.

As banks do what banks do, they took their customers’ deposits and invested it into Mortgage Based Securities (MBS) to turn a profit. These are longer-dated assets that typically take 10+ years to mature.

The thing is that when interest rates rise, bond prices go down, and vice versa. You can probably guess what happened next.

The rapid Fed interest rate hikes in the past year began netting a loss for SVB, but the bank wasn’t the only one strapped for cash. Startups were struggling in this recession-like market and needed to withdraw their deposits.

As a result, SVB was forced to liquidate its bond portfolio at a loss of $1.8 billion. To fill that hole, they proposed an urgent capital raise, but this FREAKED out depositors. Word travelled to VCs that SVB could be insolvent, who then warned their startup investments to withdraw their funds.

SVB, of course, didn’t have the liquidity to meet the demand of customer withdrawals. And that folks, is a case of a classic bank run.

The contagion begins

While this was a failure of the traditional banking system, it still found its way to bleed into crypto because as we’ve learned, many crypto players are just wolves in sheep’s clothing.

Following the collapse of SVB, several notable stablecoins, including USDC began to lose its dollar peg and fall in value. So much for being the safe haven for crypto.

As soon as Circle (issuer of USDC) disclosed their $3.3 billion exposure to SVB, the stablecoin dropped to a new low of 87 cents overnight, causing a widespread freakout.

And it certainly didn’t help when major crypto exchanges Coinbase and Binance announced the halt of USDC to USD conversions. This meant that investors that wanted to get out of the unstable coin couldn’t even do so. (Note that it has now resumed.)

It’s panic central at this point. VCs and startups are freaking out about potentially not being able to make payroll. Stablecoin holders are sitting at a loss. Tech employees are at risk of losing their jobs.

Then another major bank core to crypto gets shut down. Remember Silvergate Bank that went bankrupt? Well, Signature Bank was the second largest crypto bank and was the replacement for many crypto platforms. But lo-and-behold, Signature Bank also went under.

The bailout

On Sunday, the US regulators announced the shutdown of Signature Bank due to “systemic risk”. Almost simultaneously, the Fed, US Treasury and FDIC also came out with a joint announcement to introduce the Bank Term Funding Program.

Basically, a fancy term for a bailout.

Under this program, they will offer a 1-year loan to banks against their collateral, essentially making SVB and Signature Bank depositors whole. Phew, that’s good right, we stopped the bank run?

Try asking the small, regional banks.

What happens now?

Well, to fund the bail-out program, we can expect money printers to go on and taxpayers on the hook to foot the bill. As for the crypto industry, it looks like several crypto major platforms will have to find another alternative crypto bank to enable fiat on/off ramp.

Hmm… seems like a lot of attacks happening at once to shut down crypto, but it’s all just a coincidence, right?

As more banks start to consolidate under the government, one thing is certain, we need Bitcoin more than ever.

Stay safe everyone.

🚀In other news

KuCoin exchange is getting sued for the sale of unregistered securities. According to the New York Attorney General, KuCoin didn’t register with the state and even labelled ETH as a security.

LEGO is set to unveil its plans for the metaverse. In partnership with Epic Games, the toy company is pushing into the digital space to bring kids and adults to web3.

Meta is working on a decentralized social network. The project codenamed P92 is still in development, but it intends to rival Twitter.

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