Crypto collapse: Silicon Valley Bank falls and takes out USDC, New York calls ETH a security

By Amy Castor and David Gerard

“That’s as good as money, sir. Those are IOUs. Go ahead and add it up, every cent’s accounted for.” — Lloyd Virgil Christmas



Silicon Valley Bank topples

Silicon Valley Bank fell on Friday, March 10, following the collapse of Silvergate Bank on March 8 and Signature Bank’s close call.

SVB mostly isn’t crypto — but it’s very crypto-ish, and it had the same doomed banking model as Silvergate.

SVB’s main customers were Silicon Valley venture capital firms and their portfolio companies — tech startups that had lots of cash during the pandemic. When Silvergate fell, some venture capital firms panicked  — apparently led by Peter Thiel calling around his portfolio companies and telling them to get their money out. SVB tried and failed to raise more capital. [LA Times]

On Friday morning, California’s Department of Financial Protection and Innovation shut SVB down and appointed the FDIC as the receiver. [CA DFPI; FDIC; Bloomberg]

SVB parked its deposits in mortgage-backed securities. These were not bad assets — but they were very illiquid. When the Fed raised interest rates, MBS prices went down, and SVB’s customers needed their cash in a hurry. SVB had to sell $21 billion worth of long-term securities at a $1.8 billion loss. At close of business on March 9, SVB had a negative cash balance of $958 million.

Deposits up to $250,000 are FDIC insured and will be returned in full. But most funds at SVB were in accounts well above that amount. Large uninsured depositors are much more prone to panicking and running.

Uninsured depositors will receive an “advance dividend” — so businesses can make payroll and so on — and get an IOU for the rest. Once the FDIC gets to selling SVB’s assets, it will pay depositors what it can.

SVB made the same mistake as Silvergate: they focused on boom-and-bust customers and piled their deposits into long-term securities.

After the 2008 financial crisis, Basel III put in rules against banks doing what SVB did. But President Trump removed these rules for community banks in 2018, and SVB claimed to just be a community bank despite its large deposit base. Greg Becker, the CEO of SVB, was one of those who lobbied for the rule change. [FT Alphaville, archive; The Lever]

SVB had some crypto customers. The main ones were Circle, with $3.3 billion, and BlockFi, which had $227 million in a money market fund. The bankruptcy trustee warned BlockFi on Monday that those funds were in an MMF and uninsured, which could be a problem in bankruptcy law. [Decrypt]

Other banks with questionable balance sheets will follow on Monday. First Republic Bank had queues at branches on Saturday. [MSN; Bloomberg]

Signature Bank, which is still getting rid of its crypto exposure, hasn’t fallen to contagion as yet. But its stock went down 23% in one day on Friday. [WSJ] Update: Signature was shut down by New York on Sunday! More detail next time … [Federal Reserve; NYDFS]

USDC: I’ll buy that for a dollar

The USDC stablecoin, issued by the Centre consortium of Circle and Coinbase, is — or was — a pretty reliable dollar substitute. Even we thought USDC was about as good a dollar as you were going to get in crypto.

Centre took in deposits, put them into securities, and issued its own dollar tokens. Functionally, Centre is a bank — if a wildcat bank. And like Silvergate and SVB, it grew very quickly. USDC issuance went from $1 billion in mid-2020 to $56 billion two years later.

Centre’s banking model has the same weakness as Silvergate and SVB. Most banks take deposits and make loans. But SVB, Silvergate, and Centre all took deposits and bought bonds, leaving themselves exposed to interest rate risks.

As we said in June, USDC are “dollars” right up until there’s trouble at Circle or Coinbase. On Friday, there was trouble.

Circle says it has $32.4 billion of the $42 billion reserve at Blackrock in a money market fund. Of the $9.7 billion in cash, Circle breaks it down as follows:

  • $5.4 billion at BNY Mellon
  • $3.3 billion at Silicon Valley Bank
  • $1 billion at Customers Bank

There’s still $3.3 billion of USDC’s backing stuck at SVB. Unfortunately, only $250,000 of that is insured. That $3.3 billion is now largely inaccessible. [Twitter, archive]

SVB’s uninsured depositors can expect at least 80 to 90 cents on the dollar back. In the worst case, Circle will need $300 million to $600 million to make USDC whole.

No FDIC insurance means that panicked “depositors” are prone to stampede at the first sign of trouble. On Friday, the price of USDC fell below $1, dropping as low as $0.90 on Bitstamp. [CoinDesk]

Coinbase said on Friday that it was “pausing” USDC redemptions for the weekend during a period of “heightened activity.” The “heightened activity” would be a couple of billion dollars in redemptions in just a few hours, per blockchain data. We’ll see if Coinbase resumes redemptions on Monday. [Twitter, archive; Twitter, archive; Twitter, archive]

Binance has temporarily suspended the auto-conversion of USDC to BUSD. “This is a normal risk-management procedural step,” apparently. [Twitter, archive]

We predicted in December that USDC would get drained this year — but we didn’t expect it would be from a chunk of the backing reserve just vanishing.

USDC’s troubles are also sending shock waves across all of DeFi — USDC is DeFi’s dollar of choice. DeFi users are fleeing to other stablecoins.

Traders pulled Pax Dollars out of MakerDAO and replaced them with USDC instead — Maker hard-coded USDC as always being worth $1.00. DAI is more than 40% backed by USDC and has been trading as low as $0.90. [Twitter, archive; collateral list]

Not all of the traders are going to make it out in one piece. Here’s how one unlucky user paid $2,080,468.85 to receive $0.05 of USDT. [Twitter, archive]

To stem the bleeding, Circle announced on Saturday that it “will stand behind USDC and cover any shortfall using corporate resources, involving external capital if necessary.” [Circle blog, archive]

Paxos didn’t put the cash backing its Pax Dollar into SVB — though it did store some with Silvergate, as well as with BMO Harris, Signature, State Street, and Customers Bank. Even so, USDP dropped as low as $0.85 around 08:00 UTC on Saturday, March 11. [CoinGecko, archive]

NY sues KuCoin: ETH is a security

New York is suing KuCoin, in the same manner they sued CoinEx last month.

This suit is notable because it calls ether, the native token of Ethereum, a security under the Martin Act. [Press release; complaint, PDF]

New York Attorney General Letitia James alleges that KuCoin sold to New York customers tokens that are commodities and securities — ETH, LUNA, and UST. KuCoin called itself an “exchange,” even though it was not registered with the CFTC or SEC. KuCoin also sold a lending and staking product.

ETH has gotten away with not being called a security because in 2018, William Hinman, the former director of the SEC’s Division of Corporation Finance, said in a speech that ETH was “sufficiently decentralized.” The SEC tried to walk back Hinman’s statement when Ripple brought it up in the SEC’s case against XRP. Hinman is now an advisor for a16z Crypto.

New York disagrees with Hinman’s assessment. The complaint alleges that Vitalik Buterin and the Ethereum Foundation are a “driving force” behind major initiatives on Ethereum that impact the price of ETH.

Specifically, New York calls out Ethereum’s switch to proof of stake:

Most relevant here, Buterin and the Ethereum Foundation played key roles in facilitating the recent fundamental shift of the transaction verification method from proof-of-work to proof-of-stake.

New York is seeking disgorgement of ill-gotten gains from New Yorkers, injunctive relief, and other remedies.

This is bigger than just KuCoin and CoinEx. It’s obvious the NYAG sent subpoenas to all crypto exchanges doing business in the state and is suing the ones who ignored their subpoena.

All exchanges should check if they serve New York customers as the state requires. And check their mailboxes.

Other parties can’t enter the KuCoin case themselves to argue that ETH is not a security. But we do expect that every crypto company and organization in the US will shortly be submitting amicus briefs.

If the court does sustain that ETH is a security in New York, can the NYAG then go after anyone else who deals in ETH to New York customers? What will this mean for Coinbase in particular, the cashier’s desk at the crypto casino?

More good news for bitcoin

Number went down! The price of bitcoin crashed with Silvergate and is hovering around $20,000.

(Late February: SUCK IT FIATAILURES! Early March: I’m into bitcoin for the technology.)

President Joe Biden wants to drive crypto mining out of the US. His new budget plan for FY2024 includes a 30% tax on the electricity used for crypto mining, as “the practice is hindering the transition to a low-emission energy future.” The proposed tax would be implemented after December 31 and phased in over three years. There will also be changes to crypto trading rules, including wash sale rules. [White House, PDF, pp. 156, 159]

The Department of Justice and the US Trustee are appealing the $1.3 billion sale of Voyager to Binance US. Judge Michael Wiles is likely to be super pissed, as he spent ages yelling at the various objectors to get their damn evidence in. [Doc 1165, PDF — first five pages]

Judge Lewis Kaplan still thinks the proposed bail restrictions on Sam Bankman-Fried are too lenient. Kaplan called Sam “inventive.” The defense and prosecution will come up with something more restrictive short of just sending Sam to jail. [Reuters]

Bankman-Fried’s trial, currently set for October, may be delayed because his lawyers are still waiting for all the evidence against him. The US has agreed to a delay. [Doc 105, PDF; case docket]


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9 Comments on “Crypto collapse: Silicon Valley Bank falls and takes out USDC, New York calls ETH a security”

  1. The roof, the roof, the roof is on fire
    We don’t need no water, let the mofo burn

    The Schadenfreude is very real.
    By now, I have very reduced pity with everyone, who defends this nonsense.

  2. We are no longer bound by large banks telling us what we can do with our money. Instead we have a variety unregulated and international gatekeepers who can “pause withdrawals” at multiple possible stages of a transaction. Much better.

  3. With regard to Silicon Valley Bank – Mortgage-backed Securities were actually a tiny part of their portfolio.

    What they were mostly putting their deposits into was US Treasuries, purchased when interest rates were low. It was the sale of $21 billion of these at a large loss (due to interest rate rises), to cover customer withdrawals, that started the run…

    They put their customer’s money in the safest investment possible, and it still killed them.

    1. These assets are safe in credit risk terms but not interest rate risk. The interest rate risk was what killed them and they seemed to have had the option of not investing at such a long duration.

    2. No. It was not the “safest investment possible”.

      They tied liquidity up in investments for 10 years, many of the investments were made last year, at the same time the Fed were warning people that interests rates would continue to rise. They ignored their need for liquidity and took the gamble on longer term investments for a few percentage better return, and this is what killed them.

      Safer investments (if investments were even needed) would have been much shorter term bonds.

    3. The instrument was low risk, but the investment was HIGHLY risky. In fact it’s almost unheard of for a bank to put nearly all of it’s deposits in long term, rate sensitive bonds in such a way. They were bereft a risk manager for the last 9 months or so too.

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