The Banks Are Going Bust

A Recap Of Last Weeks Events And Why It Matters

March 13, 2023

Silvergate, SVB and Signature Bank

Over the weekend we saw serious disruption to the cryptocurrency and traditional banking sectors due to the issues faced by Silicon Valley Bank (SVB), Signature Bank and Silvergate Capital. These entities were instrumental in facilitating transactions for many cryptocurrency companies, startups, and other traditional banking users, and their failure had serious implications for the entire industry.

“Silvergate Capital, a central lender to the crypto industry, said…that it would be winding down operations and liquidating its bank,” CNBC reported. “Silicon Valley Bank, a major lender to startups, collapsed … after depositors withdrew more than $42 billion…Signature, which also had a strong crypto focus but was much larger than Silvergate, was seized…by banking regulators.”

On March 12th, U.S. Treasury Secretary Janet Yellen, Federal Reserve Board Chair Jerome Powell, and FDIC Chairman Martin Gruenberg announced measures to take "decisive actions" to ensure the complete protection of depositors at both Silicon Valley Bank and the recently closed Signature Bank.

The aforementioned banking outages caused a ripple effect throughout the crypto and traditional finance worlds as many businesses were left stranded with delayed or lost transactions. The result was a severe blow to the industry that raised concerns about the fragility of the financial infrastructure currently in place.

Earlier today President Biden issued a statement in regards to how the SVB fiasco was going to be mitigated in its potential harm to consumers. While those with $250,000 or less have been mostly guaranteed their investments back, there is still speculation about how this will effect the rest of the industry. Biden stated that management had been fired, and urged that more regulation be implemented towards banks.

The fallout from this event highlighted the need for more reliable and robust banking options in the cryptocurrency industry. While many within the sector had already recognized this need, the collapse of SVB was especially worrying as there was more than $3.3B of Circle’s funds in their custody, which led to USDC seeing a significant de-peg that fell as low as $0.869 on the Kraken exchange. As a result, many businesses began exploring alternative options, including decentralized finance (DeFi) platforms that offer more flexibility, security, and control over financial transactions.

USDC de-pegs from $1

Despite the challenges faced by the industry, many experts believe that the cryptocurrency sector will continue to grow and innovate. In fact, some argue that the current shakeup may ultimately be a positive development for the sector, as it forces businesses to adapt and innovate in response to changing circumstances. Moreover, the growing interest in cryptocurrencies (namely Bitcoin) among institutional investors and the general public suggests that the sector is here to stay.

What has essentially been deemed a “bank run” on SVB created a ripple effect that we very well might not have seen the end of. While the fallout from these failures was undoubtedly disruptive, it also highlighted the need for the sector to innovate and develop more reliable and robust financial infrastructure. Despite the challenges, the future of the cryptocurrency industry remains bright, as it continues to attract new investors and push the boundaries of what is possible in the world of finance.

What Is A Bank Run?

A bank run is a situation where depositors of a bank withdraw their funds en masse, leading to a liquidity crisis for the bank. Bank runs typically occur due to concerns about the solvency of the bank, such as rumors of bankruptcy, fraud, or mismanagement. Bank runs can happen suddenly and can be sparked by a variety of factors, including economic uncertainty, political instability, and news reports.

When a bank experiences a run, it may struggle to meet the demands of depositors seeking to withdraw their funds. Banks typically keep only a fraction of their deposits in reserve, relying on the assumption that not all depositors will demand their money at the same time. However, a bank run can quickly deplete a bank's reserves, leaving it unable to meet its obligations.

The consequences of a bank run can be severe, both for the affected bank and for the broader economy. In addition to causing the bank to become insolvent, a bank run can lead to a domino effect, with other banks and financial institutions also coming under pressure. This can lead to a broader financial crisis, with serious economic consequences, such as job losses, reduced lending, and decreased economic growth.

To prevent bank runs, governments and central banks typically have measures in place to protect depositors, such as deposit insurance and lender of last resort facilities. Deposit insurance guarantees that depositors will be reimbursed up to a certain amount if their bank fails, providing a measure of confidence and stability for depositors. Lender of last resort facilities allow banks to borrow money from the central bank in times of crisis, ensuring that they have access to the liquidity they need to meet the demands of depositors.

Overall, bank runs are a serious concern for the financial system and can have significant economic consequences. While measures are in place to mitigate the risks, it is important for banks and regulators to be vigilant and proactive in managing potential risks and preventing bank failures.

How Does Bitcoin Solve This?

One of the leading causes of financial disruption on this scale is a misrepresentation of the financial backing of people’s assets. Not your keys, not your coins, and many people that fell under the unfortunate circumstance of the bank run we saw this past weekend feared that they would not be able to access their funds. With Bitcoin, you own all of your coins - and there is no other centralized entity that is responsible for their safekeeping, unless you are keeping them on a centralized exchange. With Bitcoin, you can also see transparently where your coins are, and where they are moving to. With many companies worrying that they would not be able to pay their employees salaries and other costs while their money was locked up, if they had a portion of their treasuries allocated to Bitcoin then this would not have been an issue - and they could have pulled from those reserves to keep operations running smoothly. Ultimately, Bitcoin adds a layer of transparency to finance that can help encourage better decision making by institutions and give peace-of-mind to holders that they have true ownership over their funds. Bitcoin saw a rapid rise in value over the past couple of days, likely due to consumers understanding how important self-custody is over their money in light of recent events, and a realization that even the most reputable banks can fail.

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