Compiled by the Oliver Wyman Forum
The collapse of three banks with close connections to technology and cryptoasset firms sent tremors through the industry and broader financial markets. US federal regulators intervened to ensure that depositors wouldn’t lose money, a move that helped steady markets somewhat but revived old debates about the risks of moral hazard. These were among the notable recent developments in the future of money.
Bank Runs Temporarily Destabilize A Leading Stablecoin
A crisis of confidence reverberated between the US banking industry and cryptoasset markets as heavy withdrawals by depositors prompted the closure or seizure of three banks with close ties to technology and cryptoasset firms, and triggered sales that caused the second-largest stablecoin, USDC, to temporarily lose its peg to the US dollar. The developments prompted US regulators to declare a systemic risk exception for the two largest banks to protect all depositors.
Silvergate Capital, a major bank servicing the digital asset industry and helping institutional investors move money into and out of crypto, announced on March 8, 2023, that it would wind down its operations and return all deposits following a run that forced it to sell off assets at a steep loss. The bank had disclosed in January that it took a $718 million loss on the sale of debt securities after customers withdrew billions in deposits following the collapse of exchange group FTX. On March 1, the bank said it was evaluating its ability to continue as a going concern, prompting several cryptoasset firms to announce they would stop banking with it.
Also on March 8, Silicon Valley Bank (SVB), a major banker to the technology and venture capital sector, said it was seeking to raise fresh capital after taking a $1.8 billion loss on the sale of $21 billion of securities. The bank was hit by a wave of withdrawal requests the following day, prompting California regulators to close the bank on March 10, and put it under the control of the US Federal Deposit Insurance Corp. (FDIC). SVB had $212 billion in assets at the end of 2022, and its failure was the second largest in US history.
In the wake of SVB’s closure, Circle Internet Financial announced in a tweet on March 10, that $3.3 billion of the roughly $40 billion of reserves backing its USDC stablecoin were held at SVB. That prompted some crypto exchanges to suspend conversions of USDC and led the value of the stablecoin to drop below 88 cents on March 11, according to CoinGecko.
On March 12, the US Treasury, the Federal Reserve Board, and the FDIC announced a coordinated effort to strengthen confidence in the US banking system. They agreed to resolve SVB and Signature Bank, a lender that was closed by New York regulators and placed under FDIC receivership, in a manner that protects all depositors. That was significant because the vast majority of deposits at SVB and Signature were not insured by the FDIC.
The regulatory move sparked a rebound in USDC, which regained effective parity with the dollar on March 13. Elsewhere, the community behind MakerDAO – issuer of DAI, the fourth-largest stablecoin – said it was considering a change to its protocol to pause swaps with other cryptocurrencies to prevent weakness in other stablecoins from affecting DAI. A decentralized stablecoin, DAI had relied on USDC for more than half of its reserves.
Crypto Rebounds Even As Bank Stocks Slump
The impact of the crisis fell unevenly, with cryptocurrency prices rebounding sharply after an initial fall while prices of US bank stocks declined.
Bitcoin rose nearly 10% on March 13 to finish that day at a little over $24,000, was up nearly 24% from its lows on March 10. The market capitalization of all cryptocurrencies rose almost 18% between March 10 and March 13, to nearly $1.08 trillion.
Some analysts said the rebound reflected a belief that the crisis would deter the Fed from tightening monetary policy aggressively to contain inflation. The yield on two-year US Treasuries fell by more than half a percentage point on March 13. According to the CME Group’s Fed Watch Tool, futures prices on March 13, indicated there was zero possibility the central bank would raise rates by half a percentage point when its policy-making committee meets on March 22, down from a 40% probability on March 10. The tool put the probability of no rate increase at 27%, up from zero percent three days earlier.
By contrast, bank stocks fell sharply, with the KBW Index of US banks dropping by more than 11% on March 13, and the Stoxx Index of European banks falling by more than 6%.
Fed Orders Review Of SVB Oversight
On March 13, the Federal Reserve said its vice chair for supervision, Michael Barr, would lead a review of the regulation and supervision of SVB in light of its failure. In a speech just four days earlier, Barr had urged Congress to establish a regulatory framework for stablecoins to guard against risks to financial stability, and called on banks to exercise caution when engaging with the crypto sector.
Other Market Developments
FTX Says $8.9 Billion In Customer Funds Are Missing
Bankrupt crypto exchange FTX for the first time put a number on the amount of funds that have gone missing, saying it has been unable to account for $8.9 billion in customer funds.
In a presentation released on March 2, the exchange said it had identified around $2.7 billion of customer assets compared with their outstanding balances of $11.6 billion on the day it filed for bankruptcy protection in November 2022. John J. Ray III, who has been running the firm since it collapsed, said it wasn’t yet possible to predict how much customers will be able to recover.
Coinbase Acquires Crypto Asset Manager
The exchange group Coinbase announced on March 3, 2023, that it had agreed to acquire SEC-registered investment adviser One River Digital Asset Management for an undisclosed amount. The purchase of One River, an institutional asset manager, represents a diversification for Coinbase, which has seen retail trading volume decline in recent months.
DeFi Manipulation Attacks Take Over $400 Million
Manipulation of price oracles enabled bad actors to take just over $400 million from decentralized finance (DeFi) protocols in 2022, analytics firm Chainalysis claimed in a March 7 post.
In a typical case, attackers use large amounts of cryptocurrency to ramp up trading volume in low-liquidity tokens, artificially inflating the price and enabling the attacker to cash out quickly. While such attacks differ from hacking thefts, the firm pointed out that US authorities brought civil and criminal complaints last year against Avraham Eisenberg for allegedly stealing more than $100 million from crypto trading platform Mango Markets by manipulating the price of its token.
US Treasury Signals Intensification Of CBDC Work
The US government is stepping up its examination of whether to create a digital dollar, or central bank digital currency (CBDC), Nellie Liang, the Treasury Under Secretary for Domestic Finance, said in a speech on March 1, 2023.
The Treasury is leading an inter-agency working group focusing on the implications a CBDC might have for three broad policy objectives: preserving the global role of the dollar, promoting national security, and fostering privacy and inclusion while minimizing the risk of illicit finance. Liang said officials are weighing the potential merits of a wholesale CBDC versus a retail one and exploring whether technological advances could reduce tradeoffs between policy objectives, but she offered no timetable for taking a decision.
The working group will develop an initial set of findings to support work by officials from Treasury, the Federal Reserve, and White House economic and national security departments, who will start to meet regularly in coming months to discuss a possible CBDC, Liang said.
New York Labels Ether A Security In Lawsuit
New York State Attorney General Letitia James contended that Ether, the second-largest cryptocurrency behind Bitcoin, was a security, the first time any US regulator has made that claim in court. James made her claim in a March 9, lawsuit against KuCoin, which alleged that the Seychelles-based crypto exchange was violating US securities laws by offering tokens, including Ether, that meet the definition of a security without registering with her office.
US regulators have expressed differing views on Ether’s status, which could impact the ability of American investors to hold the cryptocurrency. Rostin Behnam, the chairman of the Commodities Futures Trading Commission, told a Congressional hearing on March 8, that Ether was a commodity, which would leave it subject to oversight by his agency. By contrast, Gary Gensler, chair of the Securities and Exchange Commission, was recently quoted as saying “everything other than Bitcoin” was a security, which would make it subject to the SEC’s more-stringent regulatory approach.