Billions Worth of Crypto Trades at Risk as Bank Shutdowns Take Toll

[BumRushDaShow]

Source: Bloomberg

The digital-asset market is coming off of a turbulent year featuring a number of high-profile blowups. Now, three shutdowns in the banking industry — SVB Financial Group’s Silicon Valley Bank, Silvergate Capital Corp. and Signature Bank — have set off a fresh set of stresses.

SVB’s failure triggered a knock-on effect in the crucial market for stablecoins after digital-asset giant Circle Internet Financial Corp., one of the biggest issuers of the widely used tokens known for their perceived safety, revealed it had $3.3 billion of reserves with the bank. The news caused Circle’s token, USD Coin, to slip below its intended 1-for-1 peg with the dollar, sending a shock through the market.

On Sunday, regulators in New York closed Signature Bank. As of March 8, the bank still held $16.5 billion in crypto-related deposits. “All depositors of this institution will be made whole,” the regulators said. Against this backdrop, it is still the shutdown of crypto-friendly bank Silvergate — and the shuttering of its electronic payments platform, the Silvergate Exchange Network — that is most weighing on the market.

For years in the early evolution of crypto, over-the-counter trading desks, hedge funds and other investors that wanted to dabble in crypto had to go through costly, lengthy and clunky contortions just to move funds between digital assets and banks, because the two types of infrastructure weren’t connected. If an investor wanted to wire money from their bank account to an exchange, it could take days via traditional banking channels — often too late to ride the latest market move. Moving funds between exchanges quickly or on weekends wasn’t possible, as banks were closed while crypto trades 24/7.

Read more: https://www.bloomberg.com/news/articles/2023-03-12/crypto-market-trades-at-risk-without-silvergate-s-si-sen-network

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A chain reaction underway.

[IronLionZion]

1. Hoping it's contained within the crypto world

and doesn't bring down the rest of us like the last financial crisis 15 years ago

[BumRushDaShow]

3. Over the past couple years

I have seen more "mainstream" retailers claiming they will accept bitcoin.

There is going to have to be a huge reckoning throughout the business world with respect to this.

[yaesu]

5. I remember Tesla announced a year or more ago that it bought over

a billion dollars of Bitcoin to use in business transactions, I wonder if they still have it and how big a hit they took after the crash.

[BumRushDaShow]

10. I think Musk's bitcoin fiasco was widely discused on DU last spring

as we gawked at his attempts to come up with $44 billion to buy Twitter. There's a big lawsuit hanging out there - https://www.democraticunderground.com/10142930858

[2naSalit]

24. +1

[turbinetree]

2. Is this stuff backed by anything other than the federal reserve and the FDIC.....

I thought this stuff had lets say no gold backing it......it was just whatever you thought the value was....

[IronLionZion]

4. It's backed up by hopes and dreams

[yaesu]

6. Let's hope but they would bail out anything to keep the economy from crashing.nt

[turbinetree]

8. So how is the FDIC backing this stuff.....just asking....

[IronLionZion]

13. FDIC insures the banks and traditional currency deposits, not the cryptocurrencies

I was curious too so I googled and found this

the FDIC does not insure any cryptocurrency exchanges; FDIC insurance does not cover cryptocurrency; the FDIC only insures deposits held in insured banks and savings associations (insured institutions); and FDIC insurance only protects against losses caused by the failure of insured institutions.

https://www.fdic.gov/news/press-releases/2022/cryptosec-info-letter.pdf

[BumRushDaShow]

7. None of that is really regulated

only the traditional banks (whether they dabble in it or not).

There was a joint statement put out in January by the FDIC and Federal Reserve regarding what they were seeing going on -

Financial Institution Letter
Joint Statement on Crypto-Asset Risks to Banking Organizations
January 5, 2023 ?|? FIL-01-2023



Summary:

The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency (collectively, the agencies) are issuing a joint statement on crypto-asset risks to banking organizations.

Statement of Applicability: The contents of, and material referenced in, this FIL apply to all FDIC-supervised financial institutions.

Highlights:

Events of the past year have been marked by significant volatility and the exposure of vulnerabilities in the crypto-asset sector.

These events highlight a number of key risks associated with crypto-assets and crypto-asset sector participants that banking organizations should be aware of.

Banking organizations are neither prohibited nor discouraged from providing banking services to customers of any specific class or type, as permitted by law or regulation.

The agencies are continuing to assess whether or how current and proposed crypto-asset-related activities by banking organizations can be conducted in a manner that adequately addresses safety and soundness, consumer protection, legal permissibility, and compliance with applicable laws and regulations, including anti-money laundering and illicit finance statutes and rules.

Issuing or holding as principal crypto-assets that are issued, stored, or transferred on an open, public, and/or decentralized network, or similar system is highly likely to be inconsistent with safe and sound banking practices.

Business models that are concentrated in crypto-asset-related activities or have concentrated exposures to the crypto-asset sector raise significant safety and soundness concerns.

The agencies will continue to closely monitor crypto-asset-related exposures of banking organizations. As warranted, the agencies will issue additional statements related to engagement by banking organizations in crypto-asset-related activities.

FDIC-supervised institutions that intend to engage in, or that are currently engaged in, any activities involving or related to crypto-assets are reminded that they are requested to notify the FDIC (see FIL-16-2022).

Attachment:

Joint Statement on Crypto-Asset Risks to Banking Organizations (PDF)

https://www.fdic.gov/news/financial-institution-letters/2023/fil23001.html

Congress is (or should be) busy with this and particularly the House, who would rather fixate on Hunter Biden and the FBI being "weaponized" while a banking set of dominoes are crumbling off to the side (let alone the daily train derailments).

[turbinetree]

9. Your background answered my question especially this.....

Business models that are concentrated in crypto-asset-related activities or have concentrated exposures to the crypto-asset sector raise significant safety and soundness concerns.

What could possibly go wrong......

[BumRushDaShow]

11. You notice the "joint statement" tiptoes around making any "regulatory" comments

just offers a caution to those entities that ARE under FDIC jurisdiction and how they will be watching for destabilization of those entities, no matter what the cause.

[keithbvadu2]

12. The big money return in crypto is:::

The big money return in crypto is:::
1. Starting it, hyping it, and getting out, leaving the
suckers holding the bag.
2. Handling/storing it for others.
a. Not your own money/crypto. Someone else's money/crypto.
b. Lots of fraud/money manipulation/theft/lack of regulation.
3. Backed by trust/faith/great promises/optimism... but no
real assets.
4. It can literally disappear and good luck with lawsuits.
------------------
A few have profited by 'investing' but not the majority.

[sarcasmo]

14. Crytpo was always a shell game, wonder how much crypto is in Musk's account?

[AverageOldGuy]

15. All of which reveals a fundamental fault in our "capitalist" system

There are two ways to make money:

1. Produce something and sell it . . . corn, wheat, furniture, a service.
2. Move money around so you make a profit off the interest.

When it's more attractive of make money by moving money around rather than producing a needed good or service, then, we are in deep shit. Which is where we are.

[NullTuples]

17. You forgot a few

3. Buy up contracts for corn, wheat, etc that hasn't been grown betting the price will go up
4. Buy up contracts for commodities (or stocks, or anything else that's traded) in the future & bet against the price going up
5. But enough of something that you can control the price of it
6. Convince people to buy into your company because it will definitely have a high return (no promises though)
7. Start a megachurch, get people to give you and god money & avoid paying many of the taxes
8. Get elected President, sell classified & top secret info to the Saudi Royal Family
9. Buy companies, borrow against them, strip them off all value, throw away the empty husk
10. Be Joe Manchin & sell your soul for a cool few million or so

[NullTuples]

16. Move fast, break things!

Sarcasm in this context, but it really is the Silicon Valley / Venture Capitalist / techbro motto.

[ashredux]

18. If you were stupid enough to put a lot, and I mean a lot of money into crypto then...

You get what you deserve. You’re a fucking idiot for doing it.

[mathematic]

19. SVB was not a crypto bank but they did have a large crypto firm as a depositor

I do believe this will require some regulatory scrutiny when the SEC et al finally get to regulating crypto.

So Circle operates a "stable coin". This is meant to be a fully backed, dollar for "dollar" crypto version of the United States Dollar. They have about 40 Billion of these created and distributed among a half dozen banks.

So Circle takes $40B from customers, stuffs it in some real banks, and issues 40B crypto tokens worth $1 that you can redeem for dollars any time you want. That sounds suspiciously like a "demand deposit" at a good-old-fashioned bank. Circle isn't a bank. It's an unregulated pseudo-bank embedded into regulated banks. This is a problem. If there was a run on Circle tokens then they would have to pull $40B from the actual banks, potentially causing a run on those banks.

This feature of Circle didn't cause SVB to fail but the news of SVB's failure and potential losses of Circle's deposits actually did lead to a run on Circle tokens over the weekend. They even suspended redemptions. According to my hypothetical above, the run on Circle could spill over to other banks holding Circle's real $. One of those other banks, to no surprise? Signature. Signature was already in trouble for its crypto banking business. I wouldn't be surprised if the run on Circle played a role in the (precautionary?) closure of Signature.

I think regulators need to kill "stable coins" and look at any kind of business that seeks to operate as a pseudo-bank, taking deposits and putting them into a real bank.

[Aussie105]

20. Easy enough to get rid of crypo overnight.

Declare it non-legal tender, and can't be used in exchange, or the purchase of goods or services.

Only legal, US Treasury issued bills and coins.

Crypto attracts gamblers. Wanting to make money off other gamblers.
It is a formula for large scale fiscal instability.

Real money, less so.

[bucolic_frolic]

21. If crypto is so safe, why do they need reserves at a bank?

They keep telling us crypto is independent of the financial system, outside government purview, and everyone is mining currency. But they have money in a bank.

[sanatanadharma]

22. Crypto money should not be guaranteed in US dollars

Covering crypto loses with US dollars is money laundering.

[LetMyPeopleVote]

23. Former board member of Signature Bank:

Link to tweet

[BumRushDaShow]

25. Ooops...