The past week was mostly bearish as various macro events had a detrimental effect on the industry. Major events, such as the voluntary liquidation of Silvergate and the fall of Silicon Valley Bank (SVB), disrupted the industry, triggering a sell-off that pushed asset prices to multi-month lows. Additionally, regulatory efforts in the United States were mostly unfavorable, exacerbating concerns and uncertainty.
Silvergate voluntary liquidation
Two weeks ago, concerns about Silvergate’s stability rose after the bank postponed its annual 10-ka filing with the US Securities and Exchange Commission (SEC). The decision raised concerns about the possibility of insolvency and its possible impact on cryptocurrencies.
The Silvergate saga spilled over into the previous week, bringing new developments. As the bank’s woes continued amid revelations of its underperforming shares and massive withdrawals, concerns over bankruptcy mounted starting last week.
Following these events, additional reports emerged indicating that Silvergate Capital, Silvergate’s parent company, had entered into discussions with the US Federal Deposit Insurance Commission (FDIC) to chart a course through the current turmoil. Anonymous sources revealed that securing investment from crucial market players was a potential option being considered.
However, on March 10, Silvergate Capital made a public statement indicating its intention to cease operations and voluntarily liquidate the bank’s assets in its best interest. Subsequently, Silvergate shares fell 43% in after-hours trading.
In the wake of these events, cryptocurrency exchanges Binance and Coinbase informed the community that they had no exposure to Silvergate. Meanwhile, speculation arose about the real catalyst for the bank’s downfall. Industry experts suggest that government regulatory initiatives may have contributed.
Regulatory uncertainty abounds in the US
The regulatory climate in the local crypto industry within the United States also continues to be a concern among leaders. The events of the past week have further exacerbated these fears despite the emergence of potentially favorable discussions.
Ethereum (ETH): a security or a commodity?
New York Attorney General Letitia James revealed on March 9 that a lawsuit had been filed against KuCoin, a cryptocurrency exchange, for offering security investments to New York residents without meeting state registration requirements.
According to Attorney General James, assets like ETH are in fact securities along with terraUSD (UST) and terra (LUNA). She revealed plans to step up regulatory efforts to crack down on exchanges that persistently violate financial laws and put investors at risk.
Attorney General James’ stance on whether ETH should be classified as a security or a commodity could set a precedent that US financial agencies can use to take action against local cryptocurrency exchanges that list the currency.
Gary Gensler, Chairman of the SEC, has suggested on multiple occasions that assets using the proof-of-stake consensus mechanism are securities. However, he has not explicitly labeled ETH as such. In a recent statement, he hinted that all crypto assets except bitcoin (BTC) should be treated as a security, a view that most bitcoin maximalists support.
However, during a Senate hearing on March 8, Rostin Behnam, Chairman of the Commodity Futures Trading Commission (CFTC), reiterated his position that ETH and all stablecoins are commodities and not securities. As such, Behnam believes these assets are under his agency’s control.
Other regulatory matters
The US regulatory scene also welcomed other new developments last week. According to reports last Tuesday, the country’s lawmakers, led by Patrick McHenry, chairman of the House Financial Services Committee, and Rep. Ritchie Torres, are seeking to reintroduce legislation to clarify the reports.
Brian Armstrong, the CEO of Coinbase, expressed his approval of the bill introduced by McHenry and Torres and praised the representatives for their work in promoting regulatory transparency. He believes the legislation will be instrumental in maintaining the United States’ position as a center of cryptocurrency innovation, particularly in the face of unfavorable legislative measures that threaten the survival of the industry.
Meanwhile, Kristi Noem, the governor of South Dakota, vetoed House Bill 1193, which seeks to exclude bitcoin and other crypto assets from the definition of money. Noem cited a potential loophole within the bill that could allow the government to sideline cryptocurrencies and position CBDCs as the only viable digital asset.
The Biden administration also floated the idea of imposing a 30% tax on cryptocurrency miners in the country. The proposal, enshrined in the Biden administration’s fiscal year 2024 budget, will require cryptocurrency miners to pay a 30% tax on electricity use. The idea has received widespread backlash within the crypto community.
The implosion and contagion of Silicon Valley Bank
Silicon Valley Bank (SVB), one of the largest banks in the United States by assets, fell last week, sparking tension in the markets that affected crypto companies with exposure to the lender.
The bank’s rapid decline occurred over a brief two-day period, sparked by the revelation that it intended to raise $2.25 billion from investors to address a significant shortfall on its balance sheets. This announcement prompted startup clients to withdraw their assets as a precaution against possible exposure to the bank in the event of a collapse.
The bank run resulted in a liquidity crisis. Silicon Valley Bank had revealed that it had sold bonds at a significant loss of $1.8 billion due to repeated interest rate hikes implemented by the Federal Reserve. SVB’s clients are primarily high-profile venture capital-backed tech companies and tech industry professionals.
The consequences of these events damaged the stock market, and the shock waves were felt in the cryptocurrency industry as well. California regulators were forced to close the bank on March 10, appointing the Federal Deposit Insurance Corporation (FDIC) as receiver to handle the disposition of the bank’s assets.
Circle and BlockFi’s exposure to SVB
The day after SVB collapsed, Circle, the issuer of the USDC stablecoin, revealed that they were exposed to the embattled bank. According to a March 11 tweet, Circle revealed that $3.3 billion of its $40 billion USDC reserve was held at Silicon Valley Bank and is now inaccessible.
Panic spread across the crypto scene, with some USDC holders struggling to convert their USDC tokens into other stablecoins. However, two of the largest crypto exchanges, Binance and Coinbase, have suspended USDC conversion. Binance suspended automatic USDC to BUSD conversion, while Coinbase announced that it would temporarily suspend USDC to USD conversion. Robinhood has also reportedly suspended USDC deposit and withdrawal.
As these events played out, the value of the USDC de-pegged from the greenback, plummeting to $0.87 on Saturday morning. Since then, the asset has come back, gaining 4.42% in the last 24 hours. Even so, it has yet to reach parity with the dollar, currently trading at $0.95 at the time of reporting.
Meanwhile, bankrupt crypto lender BlockFi revealed in its bankruptcy filing last Friday that it has a $227 million exposure to Silicon Valley Bank. The documents revealed that BlockFi’s exposure is also not FDIC insured or covered by any other financial agency.
Bloodbath throughout the market
As the chaos stemming from Silvergate and Silicon Valley Bank wreaked havoc, the broader cryptocurrency market saw massive drops in total cryptocurrency market capitalization below the $1 trillion mark for the first time since January.
The situation was exacerbated by substantial selling pressure from BTC miners who began liquidating their holdings. According to a CryptoQuant report on March 9, bitcoin miner reserves hit their lowest levels since October 2022. This added to already challenging market conditions, exacerbating the impact on the cryptocurrency market.
Consequently, bitcoin fell below $20,000 on March 10, marking the first time the asset has traded below $20,000 since mid-January. Other assets also saw similar declines, falling to lows last seen in January. Despite struggling to recapture the $20,000 zone, Bitcoin ultimately closed the week down 8.4%. Additionally, ethereum ended the week down 6%.
