This Week on Crypto Twitter: Crypto has a Banking Crisis!

Illustration by Mitchell Preffer for Decrypt

Prices took a dive this week as two banks closely connected to the crypto industry both sank. The first was Silvergate, an actual crypto bank, and the second was Silicon Valley Bank, a tech- and startup-focused institution that holds key crypto players as clients, including stablecoin issuer Circle and crypto VC firms Andreessen Horowitz (a16z) and Sequoia Capital.

On Thursday Ram Ahluwalia, CEO of SEC-registered investment advisory firm Lumida, criticized Senator Elizabeth Warren’s negative reaction to the news of Silvergate’s collapse.

Silvergate, the first crypto bank, faced a bank run that led to its downfall.

Despite facing allegations around AML, it was not these issues that ultimately caused the demise of $SI.

The responsibility for bank supervision lies with the Executive Branch, but this process was… https://t.co/rOz5EmNdHP

— Ram Ahluwalia, crypto CFA (@ramahluwalia) March 9, 2023

The following day, reports emerged that Silicon Valley Bank (SVB) was looking for outside acquisition. Not long after they hit the press, California’s Department of Financial Protection and Innovation shut the bank down and appointed the Federal Deposit Insurance Corporation (FDIC) to take over operations.

Jamie Quint, a general partner at investment firm Uncommon Capital, wrote a long and helpful primer on SVB’s downfall.

An explainer on what is going on with Silicon Valley Bank:

– In 2021 SVB saw a mass influx in deposits, which jumped from $61.76bn at the end of 2019 to $189.20bn at the end of 2021.

– As deposits grew, SVB could not grow their loan book fast enough to generate the yield they… https://t.co/xHDc4ebvsr

— Jamie Quint (@jamiequint) March 9, 2023

American investor and entrepreneur Bill Ackman called for government intervention in a multi-tweet thread.

The failure of @SVB_Financial could destroy an important long-term driver of the economy as VC-backed companies rely on SVB for loans and holding their operating cash. If private capital can’t provide a solution, a highly dilutive gov’t preferred bailout should be considered.

— Bill Ackman (@BillAckman) March 10, 2023

Fintech investor GurGavin cried that there was some double dealing from SVB executives.

Other reports revealed that SVB’s top exec was aggressively lobbying lawmakers for weaker banking regulations.

NEWS: Documents show Silicon Valley Bank’s president personally pressured lawmakers to weaken bank regs.

Some lawmakers objected.

But the bank spent big on lobbying & regs were weakened.

Today the bank became the 2nd largest bank collapse in US history. https://t.co/a8XEifQidA

— David Sirota (@davidsirota) March 11, 2023

Raging Capital Ventures, an account that provides financial, political and tech commentary, did a multi-tweet deep dive on SVB’s perilous securities investments over the last couple years.

Silicon Valley Bank $SIVB reports earnings tomorrow

Investors have rightfully been fixated on $SIVB‘s large exposure to the stressed venture world, with the stock down a lot.

However, dig just a little deeper, and you will find a much bigger set of problems at $SIVB… 1/10

— Raging Capital Ventures (@RagingVentures) January 18, 2023

A video showing the reality of a bank run made the rounds on Twitter this week.

Former SVB employee Samir Kaji called it the “quickest bank run ever” in a long thread breaking down the collapse blow-by-blow.

6/ Selling any piece of HTM securities would have created a immediate mark to market to a $16B loss. Can’t really sell loan assets that quickly either.

— samir kaji (@Samirkaji) March 10, 2023

Garry Tan, CEO of startup incubator YCombinator, shared the stark reality affecting the companies under his stewardship as a result of the news.

If you’re affected, here’s what I would say:

Hi, I’m a constituent in your district. I work at X, a startup that has deposits with SVB, which was shut down this morning.. We won’t be able to make payroll and we are one of thousands of startups that would have to shut down or… https://t.co/SvaR4bD6v1

— Garry Tan 陈嘉兴 (@garrytan) March 10, 2023

In his multi-tweet thread, New York Times journalist Paul Krugman accused SVB of “affinity fraud,” a form of confidence trickery, though not fraud in the “legal sense,” he explained.

In a deep sense — though not a legal sense — what SVB actually did was a kind of affinity fraud a la Madoff. It managed to convince the VC/startup/crypto etc world that it was one of them, part of their community, and hence trustworthy 5/

— Paul Krugman (@paulkrugman) March 12, 2023

On Saturday, Bill Ackman claimed to know what will happen to SVB depositors whose funds were locked in the bank at the time of collapse.

From a source I trust: @SVB_Financial depositors will get ~50% on Mon/Tues and the balance based on realized value over the next 3-6 months. If this proves true, I expect there will be bank runs beginning Monday am at a large number of non-SIB banks. No company will take even a… https://t.co/2BoqtCDKJt

— Bill Ackman (@BillAckman) March 11, 2023

Crypto companies distance themselves

Many crypto companies used Twitter to assure followers that they weren’t exposed to the collapsed banks. Tether CTO Paolo Ardoino said that Tether’s reserves were safe.

Chinese blockchain journalist Colin Wu confirmed Tether’s statement.

Tether explained that it doesn’t have any exposure to Silicon Valley Bank.

The cash arm of the USDT reserves is mainly in various banks in the Bahamas and Puerto Rico. The $39 billion Treasury reserve is managed by Wall Street bond-trading magnate Cantor Fitzgerald.

— Wu Blockchain (@WuBlockchain) March 11, 2023

Avalanche admitted some exposure to SVB but none to Silvergate.

In light of recent news, we would like to confirm that the Avalanche Foundation has no exposure to Silvergate and a little over $1.6mm of exposure to Silicon Valley Bank. Avalanche Foundation is saddened by the news about SI and SIVB, and hope that all depositors are made whole.

— Avalanche 🔺 (@avalancheavax) March 10, 2023

Bored Ape Yacht Club creator Yuga Labs denied it had anything in SVB.

Square the Circle

On Friday, fears started growing around stablecoin issuer Circle, a company tied to both collapsed banks.

“Circle’s cash held at U.S. regulated financial institutions: Bank of New York Mellon, Citizens Trust Bank, Customers Bank, New York Community Bank, Signature Bank, Silicon Valley Bank and Silvergate Bank.”

Oi vey..

— Adam Cochran (adamscochran.eth) (@adamscochran) March 10, 2023

Circle itself tweeted to admit that it had limited exposure to SVB via its cash reserves, some of which it held with the bank.

Silicon Valley Bank is one of six banking partners Circle uses for managing the ~25% portion of USDC reserves held in cash. While we await clarity on how the FDIC receivership of SVB will impact its depositors, Circle & USDC continue to operate normally.https://t.co/NU82jnajjY

— Circle (@circle) March 10, 2023

Crypto holders were spooked regardless, and many ditched their USDC.

Popular crypto exchange Binance closed its in-house offramp, claiming this was standard procedure.

Binance has temporarily suspended auto-conversion of USDC to BUSD due to current market conditions, specifically related to high inflows & the increasing burden to support the conversion.

This is a normal risk-management procedural step to take while we monitor the situation.

— Binance (@binance) March 11, 2023

Rival Coinbase also halted conversions.

We are temporarily pausing USDC:USD conversions over the weekend while banks are closed. During periods of heightened activity, conversions rely on USD transfers from the banks that clear during normal banking hours. When banks open on Monday, we plan to re-commence conversions.

— Coinbase (@coinbase) March 11, 2023

There were some serious signs of slippage on Saturday. At the time of writing, USDC trades at five cents short of its dollar peg.

Circle eventually confessed the full extent of its exposure to SBV, which appears to be very small in proportion to its total cash reserves.

1/ Following the confirmation at the end of today that the wires initiated on Thursday to remove balances were not yet processed, $3.3 billion of the ~$40 billion of USDC reserves remain at SVB.

— Circle (@circle) March 11, 2023

Circle CEO and co-founder Jeremy Allaire shared a blog post outlining the situation in more depth.

One seriously unlucky crypto fan would have been better off sticking with USDC after getting burned for virtually their entire $2 million when trying to jettison it quickly… Ouch!

With USDC insolvency fears rampant, users are fleeing to safety in other stables. Not all of them are going to make it there in one piece, however.

Here’s how one unlucky user paid $2,080,468.85 to receive $0.05 of USDT. pic.twitter.com/R8YdudWfsV

— BowTiedPickle.eth | Solidity Shipper (@BowTiedPickle) March 11, 2023

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Source: https://decrypt.co/123234/this-week-on-crypto-twitter-crypto-has-a-banking-crisis