On March 10, 2023, U.S. regulators seized the assets of Silicon Valley Bank. Prior to this, Silicon Valley Bank depositors began to experience a large-scale run on the bank due to concerns about the bank's financial situation. Financial regulators around the world are racing to take measures to reduce the impact of Silicon Valley Bank's collapse in order to support people's confidence in the global financial system. Foreign news comment: This is the largest bank failure in the United States since 2008.
Two days after SVB collapsed, U.S. regulators froze the assets of Signature Bank, a New York-based bank known for its work in cryptocurrency, marking the third-largest bank failure in U.S. history.
It can be said that the collapse of Silicon Valley Bank not only shook the financial and technology communities, but also Web3.
The Federal Reserve stepped in to turn the tide
U.S. regulators announced on Sunday that they would guarantee all deposits at the two banks, and the Fed also unveiled a new "Bank Term Funding Program" (BTFP) designed to give banks the option of borrowing directly from the Fed to avoid being forced into loss-making bond sales, thereby bolstering confidence in the financial system.
The Federal Deposit Insurance Corporation (FDIC) of the United States transferred all deposits of Silicon Valley Bank (including non-deposit insurance deposits) and almost all assets placed in the Deposit Insurance National Bank (DINB, created by the FDIC) to the Bridge Bank. The most direct impact was that on March 13, depositors could withdraw all their deposits in Silicon Valley Bank at the Bridge Bank. At this point, the Federal Reserve took action to protect Silicon Valley Bank and Signature Bank and stabilize the shock.
Will the Fed's actions affect the trend of the crypto market and investor sentiment? Some people believe that the Fed's rescue of state-owned banks can boost market confidence and benefit the crypto industry; however, some people believe that the Fed has over-helped traditional financial institutions, thereby reducing the market's enthusiasm for decentralized finance in the crypto industry.
The fourth TinTin Weekly was successfully held at 9 pm Beijing time on Tuesday, March 14, 2023, attracting nearly 4,049 people to participate and listen. This TinTin Weekly is themed "What impact will the Fed's rescue of Silicon Valley Bank have on the trend of the crypto market?" SharkTeam co-founder Adam, dForce founder Mindao Yang, Asia Digital Bank Chairman Assistant Xiaosong HU, Xinhuo Technology Senior Researcher Loki, and DODO Strategic Researcher Bruce were invited to discuss the Silicon Valley Bank incident. Friends who missed the live broadcast can click the link below to watch it back.
🚩Twitter Space replay link: https://twitter.com/i/spaces/1eaJbrmMLARJX
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The big-name guests shared many wonderful views on the Fed's resolute rescue behind the shock, and the sudden drop and then rise of USDC in the crypto market. The following is a review of the highlights of this issue of TinTin Weekly.
Behind the rescue
Teacher Mindao's statement that "the Federal Reserve rescued Silicon Valley Bank" is debatable and cannot be understood as a bailout of Silicon Valley Bank. "Bailout: (usually refers to financially) helping (a person or institution) out of trouble." Whether from the official caliber or from the information disclosed by authoritative media, the context reflected is different from the official attitude of the last financial crisis. Behind the "rescue" is not an unconditional and bottom-line comprehensive guarantee, but the maintenance of stability of the entire market and the protection of depositors' assets.
“Save” markets and depositors, not one bank
Teacher Xiaosong pointed out that the Fed’s rescue action was also to avoid greater systemic risks. In the context of a sluggish market, the authorities took timely measures to protect the assets of depositors and stabilize the financial market to prevent the domino effect of this incident on the entire financial market. Teacher Loki also agreed that the Fed’s move can also boost market confidence.
"Saving" interest rate policy, not one bank
From the fundamental origin of Silicon Valley Bank's bankruptcy, it was caused by internal factors such as its own asset mismatch and external factors such as the Fed's interest rate hike. The Fed's "rescue" was also a "self-rescue" of risk management of its own policies.
Since the United States entered the interest rate hike cycle, monetary policy has continued to tighten, causing financial institutions holding various types of dollar-denominated bonds such as U.S. Treasury bonds, government-backed agency bonds, and MBS to suffer a large amount of floating losses. Professor Bruce pointed out that Silicon Valley Bank's floating losses are particularly prominent because its bond holdings account for a large proportion of its total assets. It can be predicted that the Federal Reserve will be more cautious in formulating policies in the future, and it is very likely to adjust the overall pace of interest rate hikes.
Where does the volatility in the crypto market come from?
When the Silicon Valley Bank incident broke out, the biggest shock to the crypto market came from the sharp drop in the stable coin USDC. The drop was very rare for stable coins, and this was the most direct reaction of the crypto market to this incident.
Teacher Adam explained to us the connection between Silicon Valley Bank and the crypto industry - Silicon Valley Bank is not like Signature Bank, it has no direct connection with Web3. In other words, Silicon Valley Bank is not a cryptocurrency bank, it is an innovative digital bank that serves unicorns and innovative companies. Although its service areas include the crypto industry and Internet technology, there are also other companies such as biomedicine.
Teacher Xiaosong also directly pointed out that Silicon Valley Bank is a Crypto-friendly bank, but it has no very direct relationship with crypto companies. The shock of USDC this time is due to the fact that Silicon Valley Bank is one of the six banking partners of Circle, the issuer of USDC. Circle stores about 40 billion USDC cash reserves in these six banks, and about 3.3 billion USD is placed in Silicon Valley Bank. Although Circle officially stated that it will ensure that Circle and USDC continue to operate normally while waiting for the FDIC to take over Silicon Valley Bank and how it will affect its depositors, the confidence of crypto users still rebounded along with the price after the Fed took action.
To summarize, the cause of this crypto market shock is that a major stable coin briefly lost its peg to the U.S. dollar after its reserves were trapped in a failed bank.
Crypto Revelation: Decentralized Assets Rely on Centralized Crypto Banks
Looking back at the whole incident, it was just a false alarm for bank depositors and USDC holders, and there was no actual loss of personal assets; for the entire crypto market, it showed an overall recovery within three days. However, the decentralized world pursued by crypto enthusiasts and Web3 pioneer developers is so dependent on the stability and liquidity of highly centralized banks/institutions. Will this bring potential risks to the truly decentralized crypto market?
Teacher Loki clearly pointed out the doubts that this incident has brought to the crypto industry in the market: When cryptocurrencies are different from centralized assets and emphasize decentralization and trust, so that users who do not trust centralized banks can agree and reach a consensus, but when banks can directly influence cryptocurrencies? How will user trust continue? How will the situation of the crypto market develop?
Stable Coin Category
Professor Adam proposed that we need to analyze different types of Stable Coins. Stable Coins can be divided into three main types, namely, Stable Coins collateralized by legal currency, Stable Coins collateralized by cryptocurrency, and Stable Coins without collateral.
Stable Coin, which is collateralized by fiat currency, is pegged to the U.S. dollar at a one-to-one ratio. When measured in U.S. dollars, there is no risk of fluctuation in the value of the collateral. The limitations of this type of Stable Coin are centralization, opacity, no guarantee for storing funds or redeeming tokens, and collateral costs.
Stable Coin, a decentralized debt issuance backed by cryptocurrencies and/or multiple assets, has collateral and uses cryptocurrencies as excess collateral. In this model, the collateral supporting Stable Coin is itself a decentralized crypto asset. Its limitation is that the collateral fluctuates, and it has almost no resistance to black swan events (such as the collapse of Silicon Valley Bank), and requires excess collateral.
Stable Coin without Undercollateralization: Seigniorage Shares/Decentralized Banks/Algorithmic Stability Mechanisms. It is the supply of Stable Coins that is expanded and contracted by algorithms, just like central banks do with fiat currencies. Its limitations are that stability is usually maintained by centralized mechanisms, monetary policy is still complex, unclear, unproven, and incentives may be insufficient. Most of these projects have high volatility and price declines.
We can see that the collapse of Silicon Valley Bank has a very direct impact on centralized stable coins, which is an inherent risk. However, for algorithmic stable coins, there will be no obvious market fluctuations.
How to avoid risks with Stable Coin? Listen to what experts say
Professor Bruce suggested that we need a more decentralized Stable Coin solution. Professor Adam said that for central Stable Coin, it is necessary to promote its own credibility and security through asset transparency and asset reserves; for algorithmic Stable Coin, a good business model can better avoid liquidity risk or death spiral risk, and a considerable scale is the prerequisite for good market risk control.
Teacher Xiaosong put forward his vision and ideas for the future. From the perspective of the issuing bank, whether there will be a licensed digital bank in the future that can not only achieve legal and compliant supervision, but also make Stable Coin more "stable" through the openness and transparency of on-chain data.
From the project perspective, especially for projects in the DeFi track, Mr. Bruce gave several suggestions: 1. Reduce excessive reliance on centralized stable coins; 2. Design defense measures against external risks in the DeFi protocol, and more importantly, explore more decentralized solutions; 3. Risk control of reserve funds, respond quickly and freeze assets according to market conditions to control the impact of risks.
Web2 to Web3, it still takes time
It takes time to jump from Web2 to a completely Web3 world. During the transition from Web2 to Web3, we need a "Web5" (Web2 + Web3) solution. As Professor Xiaosong said, the crypto market needs to embrace regulation during this period to achieve the desired credibility and transparency.
It will still take time to move from centralization to decentralization.