Crypto’s collapse with a catastrophe following the collapse of SVB

Hello and welcome to the latest edition of the FT’s Cryptofinance newsletter. This week we take a look at Circle’s flirtation with disaster.

The Crypto banking crisis is in full swing. Silicon Valley Bank, Signature Bank, and Silvergate Capital once served as a key triad of lenders happily taking deposits from crypto companies — but they’re all gone now.

The demise of the trio has left even fewer options for an industry with already tenuous ties to the mainstream banking system.

That’s a serious issue, but events have also highlighted another weakness in the industry: unstable stablecoins at a time of acute pressure.

These tokens are intended to be the link between crypto and state money, serving as native digital dollars and holding their value one-to-one against the dollar at all times. Most of the day-to-day trading on crypto exchanges is not hard-currency-to-crypto, but the buying and selling of stablecoins against other crypto tokens.

After Circle admitted a $3.3 billion exposure to SVB, its USDC token briefly plummeted to 88 cents instead of the usual $1 price point. USDC is the second largest stablecoin and is also commonly referred to as Trading uses coin in decentralized finance.

This isn’t the first time something like this has happened. Last year, the USDT of market leader Tether also its peg to the dollar, days after the collapse of smaller rival stablecoin TerraUSD. The failure of the latter sparked the unprecedented Crypto market crash of 1922.

Circle’s de-pegging also risked an emergency that had the potential to eclipse last year’s crash. “That would have been bigger than the collapse of Terra/Luna. Maybe we would have called it Cryptos nuclear Winter,” Larisa Yarovaya, Associate Director of the Center for Digital Finance at Southampton Business School, told me.

But the threat was brief. Circle pledged financial support and US regulators stepped in to ensure deposits at SVB were safe and offered USDC a lifeline that probably wasn’t the regulators’ primary concern. The token has recovered to its peg.

“There was some relief as a new stablecoin crisis was averted,” said JPMorgan’s Nikolaos Panigirtzoglou.

Dante Disparte, Circle’s chief strategy officer and head of global policy, told me recent events are tantamount to the “Crypto Cuba Crisis,” a potential catastrophe that was averted at the last minute.

In his view, the SVB was a “black swan failure” and it was “banks that introduced risk into the digital asset market.” From my point of view cryptos real The Cuban Missile Crisis was USDC stance breaking, not bank failure.

Still, many crypto evangelists have come to Disparte’s conclusion. Ark Investment Management chief executive Cathie Wood said crypto is being used as a “scapegoat” for failings in banking regulation and the industry is “uncommitted to either banks’ investment decisions or the Fed’s decision to hike rates.” do.

Looking back is always wonderful. The SVB had billions of dollars in uninsured deposits and bought cheap long-term government bonds without hedging against interest rate hikes. His customers who held the deposits were a concentrated group of similar firms that displayed a herd mentality. The ingredients for the cocktail were there.

Despite this, customers cannot be expected to follow or understand their bank’s business model or risks. That’s the regulator’s job, so the industry has a point on the quality of oversight. It is a two-tier system, broken down into major, essential, and others.

However, there’s a world of difference between a startup with a few people and $100,000 in the bank and someone looking for somewhere to park $3.3 billion. It’s no secret that US banking regulations limit deposit insurance to $250,000. Ensuring billions of dollars are absolutely safe is part of basic risk management, if not by the company then by its investors.

“We can’t blame the entire banking system, Circle has looked at these particular banks that have taken risks and this is the result,” Yarovaya said.

Circle has now transferred $5.4 billion in cash to BNY Mellon, a designated global systemically important bank, so the money is safe. But the episode underscored two points: crypto is as dependent on the health of the US banking system as anyone else and that USDC is now “too big to fail”.

As Carol Alexander, a finance professor at Sussex University, told me earlier this week, “Circle had major exposures to SVB and the very significant depegging of their USDC stablecoin. . . should be a massive red flag for the entire crypto ecosystem.”

What do you think of USDC’s de-peg? Is the fault with the banking system or with Circle? email me scott.chipolina@ft.com.

Weekly Highlights

• US and German authorities, with the support of Europol, shut down a popular mixing service, ChipMixer, over alleged involvement in money laundering. Authorities seized about $46 million, but it is estimated that the platform may have facilitated $2.8 billion in crypto-asset laundering. Not surprisingly, ChipMixer was also used by North Korea’s notorious criminal syndicate Lazarus Group.

• It’s never too busy for a crypto hack. A decentralized finance protocol called Euler Finance has been the victim of a $197 million theft. According to the BlockchainAnalysis platform Chainalysis hackers stole funds in USDC as well as other coins. In response, Euler Finance did what all helpless DeFi-Platforms do when exploited: offer money “in the hope” that this would lead to a recovery of funds. The reward here is $1M. Inspirational stuff.

• The list of lawsuits surrounding FTX is growing. This week, plaintiffs filed suit on behalf of US and non-US FTX clients, turning their crosshairs on “influencers” who promoted, supported, or actively participated in the failed exchange’s offering and sale of unregistered securities. You can read the full lawsuit here.

Soundbite of the week: Operation Chokepoint under the magnifying glass

One of Washington’s crypto’s biggest defenders, Republican Congressman Tom Emmer of Minnesota, came out swinging on Twitter on Wednesday against the government’s actions over the past week.

“The government’s demonstrated effort to choke digital assets from the United States financial system is a lazy and destructive strategy that stalls innovation and subjects American digital asset users to less sophisticated regulatory rights.”

Data Mining: Tether and a “Flight to Safety”

If you had “Investors will migrate to Tether token for security reasons” on your 2023 crypto bingo card, congratulations.

Trades between Circle’s USDC token and Tether’s USDT token spiked on March 11, according to new figures from data provider CryptoCompare. This trade indicated traders were fleeing USDC to their rival.

Tether’s de-pegging over the past year prompted my colleague Adam Samson and I to ask Tether’s Chief Technology Officer Paolo Ardoino fundamental questions about USDT reserves. He said he didn’t want to reveal the company’s “secret recipe.”

Cryptofinance is published by Philip Stafford. Please send any thoughts and feedback to cryptofinance@ft.com.

Your comments are welcome.