The death of Silicon Valley
Oops did I miss a word in that title?
For those of you waking up to a ~10% decline in your net worth of "safe" USDC stablecoin portfolio, that was supposedly overcollateralized and never, ever at risk of depegging, I’ll do a quick tl;dr on what happened and the broader implications for crypto and innovation if things do turn out to be as bad as your Twitter feed is saying.
Didn’t mean to be alarmist. Here’s a coolheaded recap of the events in plain and simple English:
Silicon Valley Bank bought $80B in 10 year Mortgage Backed Securities (i.e. housing loans) with a yield of ~1.5% in 2022
As the Fed raised interest rates (faster than ever in history), the value of these securities crashes. When a 2 year US Treasury Bond is yielding over 4%, who would want to buy a 10 year MBS at ~1.5%?
They tried to sell some of these securities for a $1.85B loss… but in comparison, their net income was $1.5B in 2022
Panic begins to ensue. As their stock drops 60%, Peter Thiel advises companies to pull money from SVB
They tried to raise $1.75B to cover a loss in their liquid fixed income portfolio.
The quickest bank run in history. In less than 48 hours, over $42B is withdrawn and they are left with a balance of negative $1B
The regulators shut down SVB in the “biggest bank failure since global financial crisis”
A bunch of companies get caught in the crossfire. Circle had ~25% of USDC reserves held in cash in SVB
Who would've thought that the biggest counterparty risk in holding a stablecoin was a bank? Before Thursday no one wanted to go anywhere near USDT because it wasn't collateralized by a US bank. But here we are, with exactly that being the risk.
As we learnt during the 2007 global financial crisis, just because you are a bank doesn't mean you are safe. And isn't that the reason why we started this bitcoin thing in the first place?
Hate on Tether as you wish, but it has the Lindy effect. It's been around since the very beginning, and sure, it may not be the cleanest of all organizations, but we have been using it and it has been redeeming our magical internet money for real world moneys for as long as we've been in this digital playground.
Plus, what many of us privileged "global north" folks fail to notice when we cry about our audits and our transparency is that Tether actually powers the financial systems of many countries which have no payment rails or trustworthy banking institutions. Millions of people make payments through USDT because a) it's fast and cheap, and b) it's better than getting your money arbitrarily frozen by the local authorities (or Uncle Sam).
When you're faced with the option of cash under the mattress, gold coins, a hyper-inflationary local currency, volatile cryptocurrencies or USDT, what do you choose?
Regardless, we can only hope that the USDC depegging is just drastically overblown as CT dogpiles onto yet another narrative trade and everyone gets liquidated on Monday when Circle decides to start defending the peg. Just because $3.3B of their $11.4B in liquid backing is in an insolvent bank doesn't mean it's gone forever.
Keep in mind that Circle is still honouring redemptions, which means that they are still solvent. If there is an orderly recovery process of SVB assets, Circle may only be facing a few percent haircut from their deposits. If not, a collapse of Circle would represent the death of trust in this industry for Western institutions because it is the cleanest and smoothest stablecoin in the room.
But no one knows at this stage. Better to wait for more clarity before panicking. And besides, Vitalik has been buying the USDC dip.
The real problem is with all of the startups that held cash balances in SVB and were counting on this to make payrolls on Monday. Many of them will be scrambling to cover costs.
Symbolically this does not bode well for America's startup climate. America was once the heart of innovation and opportunity, where people from all parts of the world flocked to share their brilliance and curiosity.
Now that image is eroding. Regulators are tightening the noose on crypto…
…and overseas territories are working to attract innovation, from Switzerland’s Bitcoin payment infrastructure initiative in Lugano to Abu Dhabi’s $2B web3 startup fund to the UAE’s Ras Al Khaimah digital and virtual asset free zone.
Innovation is decentralizing.
What is a bank in 2023 if a bank is at risk of a bankrun from a tweet?