How the Silvergate and Silicon Valley Bank Insolvency effects crypto
Our analyst and fund management team of Tigris Web3 – Austrian Crypto Fund, managed by Venionaire Investment GmbH – are currently monitoring the market situation. They are of course evaluating possible scenarios for following developments. Most important for our investors and clients, Tigris Web3 has had zero exposure in stablecoins, and no exposure to Silvergate or Silicon Valley Bank. The funds strategy is to reduce counter party risk through usage and investment in decentralized projects. This excludes the investment or cooperation with centralized entities like crypto banks, stablecoin issuers and centralised exchanges. The following article gives a wrap up and analytical interpretation of how the current situation might unfold.
What happened so far?
On the 10th of March, the 18th largest US bank by nominal deposit amount, Silicon Valley Bank, has become insolvent. Thus it ended up in FDIC receivership.
The bank became insolvent due to the inherent nature of the current banking system – the fractional reserve system. A fractional reserve system allows banks to not have full treasury backing, but can mark-to-market their reserves, which in the case of a bank run, makes the bank insolvent. Essentially and summed up to the highest level, this is what SVB faced in the second week of march.
Spillover into crypto markets
The insolvency of the bank has heavily hit Circle, the company behind the 2nd biggest stablecoin, USDC. USDC, which is fully backed by US Dollar, had 3.3 billion USD worth of collateral on the accounts of the bank. Even though 3.3 billion USD is shy of 8% of the total market capitalization of USDC, the price of the stablecoin, which is supposed to be as the name indicate – stable at 1 USD, started dropping overnight. The insolvency and liquidation of Silvergate earlier this week, a bank heavily involved in crypto markets, who was also a partner of Circle, is adding fuel to the fire.
Figure 1. USDC Market cap (1D Chart) source: coinmarketcap.com
The potential amounts lost on Silvergate are currently unknown. This led to the beginning of a bank run on USDC, with lots of crypto market participants swapping into other stablecoins, large cap crypto currencies or Fiat USD. Naturally, this caused the USDC depeg which at this time is larger than the estimated (potential) gap of collateral caused by the Silicon Valley Bank insolvency.
Another stablecoin project, DAI, has also disconnected in the wake of the scandal. Even though DAI had no exposure to the bank directly, 50% of DAI reserves are backed by USDC as collateral.
Systemic TradFi risks in crypto markets
The irony of this case lies in the fact that theoretically flaws of the traditional finance economy rarely affect crypto projects, as one of their inherent ideological pillar is to create a better, fairer and more resistant system. This case is unique though. The cause of the drop is a systematic counter-party risk. There is no inherent crypto market flaw or fraud at play. One can not blame Circle, as Circle is the most transparent and audited-on-point stable-currency provider. Even Silicon Valley Bank itself can at this point and with the information available so far not been held fully responsible either. Bank runs can happen. In this cause triggered through supposedly poor communication and unlucky timing. Even though their reserves were as conservative as possible, they still tumbled into insolvency due to fractional reserve policy installed by the FED.
One likely outcome is an even tighter and stronger accelerated approach to the regulation of stablecoins by financial market authorities and central banks – with the ultimate peak of this process being the eventual issuance of CBDCs. Although not very likely, we might even see the FED stepping in in some way in the next days, potentially even taking control of Circle. The meltdown of Luna and UST, and most recently the collapse and alleged fraudulent nature of FTX already previously enforced this step from a regulator’s point of view. Many crypto market participants see this very sceptical due to ideological resons. But increased regulatory security with fully regulated and safe stablecoins creating the ultimate smooth Fiat on- and offramp and DeFi backbone could be one of the necessary triggers for broad adoption of the technology.
Tigris Web3 analysis
Situations like the one with Silicon Valley Bank and Circle enforce our view for the need for decentralized and fully transparent solutions which mitigate counterparty risk. That is one of the main pillars in the investment thesis behind Tigris Web3, a Web3 focused fund managed by Venionaire Investment. Overall we see very low systemic risk at this point for both the portfolio assets and broader thesis of the fund. Circle hast very strong institutional backing. There is too much at stake (both financially and in trustworthiness) compared to what the actual financial damage through the insolvency of Silicon Valley Bank might be. Tigris Web3 is neither invested in USDC, DAI or any other stable coin. Also, we have no funds or accounts with Silicon Valley Bank or Silvergate. If you want to learn more about Tigris Web3, our portfolio assets and projects and investment thesis reach out to email@example.com
As this situation is currently unfolding, the parties involved are releasing new data and insights on an ongoing basis. This article only reflects the interpretation and knowledge based on information available until 11th March 2023, 10:30am CET. This is no financial advice. Investing in crypto assets is of the highest risk and can lead to a total loss of funds invested.
Authors: David Teufel & Ivo Pernar