GB Market Commentary 13/03/2023
by Marcus Sotiriou
Bitcoin jumped over 10% last night, as the US government confirms they will step in to protect depositors of Silicon Valley Bank and Signature Bank.
Last week, three banks which were the easiest for crypto businesses to get fiat banking in the US -Silvergate, Signature and Silicon Valley Bank – closed.
I think this could have significant implications for crypto regulations in the US and bank’s ability to integrate digital asset trading or custody. This is due to the narrative of crypto causing the problem, which certain politicians are trying to portray.
On Wednesday, Senator Sherrod brown, Chair of the Senate Banking Committee, said, “As the impact of FTX’s collapse continues to ripple outward, today we are seeing what can happen when a bank is over-reliant on a risky, volatile sector like cryptocurrencies.” In addition, Senator Warren said, “As the bank of choice for crypto, Silvergate Bank's failure is disappointing, but predictable. Now, customers must be made whole & regulators should step up against crypto risk.”
What these Senators fail to realise though, is that Silvergate’s demise was not a crypto problem. Silvergate’s collapse was due to $13.3 billion of demand deposits, that depositors could withdraw in minutes, supported by only $1.4 billion of cash. As opposed to being a problem caused by digital asset trading, it was clearly due to Silvergate not having enough cash leading to the lack of capital from the bank run.
Silvergate operated on fractional reserves, like every other bank, and the loss of consumer confidence which was exacerbated by a Senator letter which caused panic on social media. This undermined public trust in Silvergate, which catalysed its downfall.
In this case, Silvergate was denied due process. There is a clear agenda, in my opinion, against all crypto businesses from US politicians. We could well see companies that provide digital asset trading infrastructure move offshore because of this stance.
Some confidence has been restored in the crypto market as USDC has bounced back to $0.987 from a low of around $0.90. In addition, a letter from US regulators said, "All depositors of this institution (Silicon Valley Bank) will be made whole. As with the resolution of Silicon Valley Bank, no losses will be borne by the taxpayer." The same was said for Signature Bank too.
Ultimately, it is clear that continued hikes risk further destabilising the financial system, so the time in which the Fed will need to pause and then pivot could have been moved closer by the events of last week.
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