Stablecoins significantly depegged as the whole cryptocurrency industry rejoiced, stating « we told you so, » following the collapse of Silicon Valley Bank, which helped Bitcoin gain significant support.
Following the discovery of $3.3 billion of its $40 billion in total reserves held by Silicon Valley Bank, USDC, the biggest stablecoin in the world by market value, fell to $0.87. This significant depegging resulted from a chain reaction that started with the loss of the SVB. Coinbase, a Center Consortium member, said that it will halt USDC To USD conversion over the weekend, which was another aspect that contributed to this.
USDC wasn’t the only unexpected casualty of this choice, either. Stablecoins like DAI, which utilised USDC as a reserves asset, also depegged. Positive and negative market moves can ripple across the crypto sector.
However, stablecoins started to move again After the US government intervened and bailed out the conventional financial system. People are speculating as to whether the government bailout was a test of stablecoin effectiveness in the banking sector as the effects of depegging has now started to reverse.
Banking Crisis’ Effect on Digital Assets
Three years later, 2020-driven financial unrest has swept into the established and decentralized financial sphere, removing numerous institutions’ capital in the process. Despite their former size, Signature and SVB are merely the most recent casualties of this effect.
Even the most ardent cryptocurrency opponents now doubt the sustainability of conventional financial institutions due to recent banking turbulence.
Numerous other institutions that have failed are also stoking similar doubts. Shortly after Silicon Valley bank failed, the share price of Deutsche Bank dropped precipitously, dropping by about 15%. Over the course of a month, the share prices of the German Bank fell by 24%.
Another tale that collapsed was Credit Suisse. People rushed to the Swiss bank and withdrew more than 11 billion Swiss Franks as a result of speculations that the company was about to fail.
Even though these allegations weren’t true, Credit Suisse nevertheless suffered, which prompted the government to intervene with a « emergency rescue deal » in which Credit Suisse paid a cheap price to acquire UBS, a competitor.
According to Jason Allegrante, the chief legal and compliance officer of Fireblocks, a blockchain infrastructure business, the major cause of this problem is enormous portfolios that only include low-interest bonds.
Banks must always have highly liquid assets in order to maintain a high liquidity ratio, which means they must do so. Yet another factor contributing to banks’ inability to withstand the assault of inflation is the lack of open discussion about this issue.
According to Allegrante, the present financial unrest may cause many regional banks to fail, which would cause a « few systematically important banks to hold a large concentration of deposits. »
A key source of worry is that centralized banks retain substantial portions of deposits. The blockchain economy has been attempting to oppose the same centralized, authoritarian, and dystopian-level approach.
However, as these organizations grow, consumers can become more inclined to invest in digital assets.
A cryptocurrency exchange’s Becky Sarwate has weighed in, claiming that « the way Bitcoin blossomed from the wreckage of the 2008 financial crisis » is analogous to how the crypto economy will flourish as the dangers of relying on financial institutions like SVB and Signature are now out in the open.
The similarities between the traditional economy and cryptocurrencies were further highlighted by the author, who stated that « traditional pathways prove equally volatile from the perspective of crypto-curious participants. »
Sarwate also acknowledged that, despite the crypto economy’s lack of the same level of security as traditional banking, it offers a variety of advantages that make it an excellent choice for risk-averse investors.
Stablecoins are a fantastic choice for risk-Averse investors
Authorities may reduce the hazards connected with stablecoin through a variety of means. Concerns about the security hazards of digital assets will be addressed by providing insurance to organizations involved in the cryptosphere. This was proved by the recent rescue of SVB, which served as insurance for USDC and other stablecoins.
So FDIC insurance might be seen as a strategy to increase the use of cryptocurrencies.
It was initially only intended to guarantee payments up to $250,000. But the FDIC made the decision to intervene and make sure that each depositor could get their full deposit back.
The FDIC’s intervention offers an intriguing example of the interdependence between conventional and blockchain-powered financial institutions.
The spokeswoman for Circle Consortium stated that « Emphasis here is on the importance of shoring up markets and confidence, protecting consumers and ensuring the outcomes, in the long run, prove that the stress test could have been weathered by traditional financial firms and circle. »
The spokesman also explained how dollar-backed stablecoins are reliant on established institutions because to the recent bailout.
Following the bailout announcement, Circle transferred the cash component of UDC’s reserve to the Bank of New York Mellon. With $44 trillion worth of assets under its custody, it is the biggest custodian bank in the world.
Bank partners who facilitate the minting and redemption of USDC hold the remaining cash.
According to the company, it wants to become a « fully regulated institution under the supervision of the federal government » since it will put the US at the forefront of discussions about digital assets across the world.
Chief investment officer of Yield App, Lucas Kiely, has claimed that concerns over liquidity were to blame for the depeg. Danny Talwar, head of tax at Koily, backed up this assertion by claiming that the recent depeg was only a temporary setback brought on by the current bank run.
Stablecoin trust hasn’t really altered, according to Sarwate
Even after the latest bank run, according to CEX.io’s Becky Sarwate, consumers still have faith in stablecoins. « Slight changes are temporary in the stablecoin space, » she claimed, noting that after the depegging event, USDC’s advantages were still available to users.
The people that make up MakerDAO appear to share that opinion. They voted to preserve USDC as the main collateral for a stablecoin, dismissing worries about the depeg. They chose this over Paxos Dollar and the Gemini Dollar.
The solution for crypto solutions is not unbanking
To a fault, unbanking has long been regarded as the key to gaining financial independence. The now-defunct Celsius placed too much emphasis on this aspect. And several more that have followed concentrate on the same elements. On the other hand, banks and cryptocurrency firms require each other, claims Koinly’s Talwar.
Only banks are able to offer the type of safety net that is necessary for innovation. Unbanking and a lack of interest in alternative banking providers will thus be more detrimental to blockchain technologies than beneficial.
Complacency is another issue that raises worries.
The government’s decision to provide a full bailout, according to Kiely of Yield App, suggests that supervisory criteria need to be revised.
He worries that underperforming banks would mismanage consumer cash and then just rely on government assistance. As a result, banks would be « too comfortable with themselves » while managing consumer cash.
Additionally, Dalwar has emphasized the necessity for additional stablecoin choices, arguing that their « fiat-backed nature is the key to leveling the playing field between finance and cryptocurrency. »
