Hello. Welcome to the latest edition of the FT’s Crypto Finance Newsletter. This week, we’re featuring Circle’s play with disaster.
The virtual currency banking crisis is in full swing. Silicon Valley Bank, Signature Bank, and Silvergate Capital once served as important three-party lenders willing to accept deposits from crypto companies, but now they are all gone.
The trio’s disappearance leaves an industry already tenuously connected to the established banking system with even fewer options.
While this is a serious issue, the incident also highlights another weakness in the industry: stablecoins are unstable under severe pressure.
These tokens are supposed to act as a conduit between cryptocurrencies and sovereign money, acting as a native digital dollar and always maintaining a 1:1 value against the dollar. Most daily transactions on cryptocurrency exchanges are buying and selling stablecoins against other crypto tokens, rather than hard currency to cryptocurrencies.
After Circle acknowledged its $3.3 billion exposure to SVB, its USDC token briefly plummeted to 88 cents instead of its usual $1 price. USDC is the second largest stablecoin and is also widely used as a trading coin in decentralized finance.
This is not the first time something like this has happened. Last year, market leader Tether’s USDT also broke its peg with the dollar, days after the collapse of smaller rival stablecoin TerraUSD. The latter failure triggered an unprecedented market crash for cryptocurrencies in 2022.
Depegging Circle also risked an emergency situation that could dwarf last year’s crash. “This would have been bigger than the Terra/Luna collapse. We would probably have called it the nuclear winter of cryptocurrencies,” said Larisa Yarovaya, Deputy Director of the Center for Digital Finance at Southampton Business School. he told me.
But that threat was short-lived. Circle promised financial support and U.S. regulators moved to ensure the safety of SVB deposits, providing USDC with a lifeline that was perhaps not the regulator’s biggest concern. The token was restored to the peg.
“There is some relief that another stablecoin crisis has been avoided,” JPMorgan’s Nikolaos Panigirtzoglou said.
Dante Disparte, Circle’s chief strategy officer and head of global policy, said recent events were comparable to “crypto’s Cuban Missile Crisis,” with a potential catastrophe averted at the last minute.
In his view, SVB was a “black swan failure” and “a bank that introduced risk into the digital asset market.” In my view, the real Cuban Missile Crisis for cryptocurrencies was USDC breaking its peg, not a bank failure.
Still, many cryptocurrency evangelists have come to Disparte’s conclusion. Cathie Wood, CEO of Ark Investment Management, said that cryptocurrencies are being used as a “scapegoat” for bank oversight mistakes, and that the crypto industry “has a lot to do with banks’ investment decisions and the Fed’s interest rate hikes.” It has nothing to do with the decision.”
Hindsight is always great. SVB had billions of dollars in uninsured deposits and bought cheap long-term government bonds without hedging against rising interest rates. Customers holding deposits were a concentrated group of similar companies exhibiting herd mentality. The cocktail ingredients were there.
Even so, customers cannot be expected to follow or understand the bank’s business model or risk exposure. The industry has a point when it comes to the quality of oversight, as that is the job of regulators. This is a two-tier system, divided into Large, Systemically Important, and Other.
That being said, there’s a world of difference between a startup with a few people putting $100,000 in the bank and someone running around looking for a place to put $3.3 billion. It’s no secret that U.S. banking regulations limit deposit insurance to $250,000. Ensuring that billions of dollars are completely safe is part of fundamental risk management, if not from the company’s side then from its equity backers.
“You can’t blame the banking system as a whole. Circle worked with certain banks that took the risk and this is the result,” Yarovaya said.
Circle has now moved $5.4 billion in cash to BNY Mellon, a designated global financial institution, so your funds are safe. However, this episode emphasizes two points. One is that cryptocurrencies, like any other currency, depend on the health of the US banking system, and that USDC is now “too big to fail.”
Carol Alexander, a finance professor at the University of Sussex, told me earlier this week: . . This should be a major red flag for the entire cryptocurrency ecosystem. ”
What do you think about the USDC peg loosening? Is the problem with the banking system or Circle? Email us at scott.chipolina@ft.com.
weekly highlights
U.S. and German authorities, with support from Europol, have shut down Chipmixer, a popular mixing service, for allegedly being involved in money laundering. Authorities seized about $46 million, but estimates suggest the platform may have facilitated $2.8 billion in crypto laundering. Unsurprisingly, ChipMixer was also used by North Korea’s notorious criminal organization Lazarus Group.
You’re never too busy for cryptocurrency hacking. A decentralized finance protocol called Euler Finance suffered a $197 million theft. According to blockchain analysis platform Chainaries, hackers stole funds in USDC and other coins. In response, Euler Finance did what all incompetent DeFi platforms do if exploited, and provided funds “in the hope” that it would lead to a recovery of the funds. The reward here is $1 million. Something moving.
The list of lawsuits surrounding FTX is growing. This week, plaintiffs filed a lawsuit on behalf of U.S. and non-U.S. FTX customers, alleging “influenced persons” who facilitated, assisted, or actively participated in the failed exchange’s offering or sale of unregistered securities. I set my sights on. You can read the full lawsuit here.
This week’s Soundbite: Chokepoints in surgery under the microscope
Minnesota Republican Rep. Tom Emmer, one of Washington’s biggest advocates for cryptocurrencies, took to Twitter Wednesday to slam the government’s actions over the past week.
“The government’s proven efforts to lock digital assets out of the U.S. financial system are a lazy and destructive strategy that will stall innovation and subject U.S. digital asset users to less sophisticated regulatory jurisdictions. It is placed in
Data Mining: Tethers and the “flight to safety”
If your 2023 crypto bingo card says “Investors move to Tether tokens for safety,” congratulations.
According to the latest figures from data provider CryptoCompare, trade between Circle’s USDC and Tether’s USDT tokens surged a whopping 828 percent to $6.1 billion on March 11, when USDC began depegging. The trades showed traders are fleeing USDC to rivals.
In the wake of Tether’s depegging last year, my colleague Adam Samson and I asked Tether’s Chief Technology Officer Paolo Ardoino some basic questions about USDT reserves. He said he did not want to reveal the company’s “secret sauce.”
Crypto Finance is edited by Philip Stafford. If you have any comments or feedback, please send them to cryptofinance@ft.com.
Comments are welcome.
