DEX vs CEX Finance debate revives as Silicon Valley bank failure

1 Apr 2023

Cryptocurrency advocates see the collapse of Silicon Valley Bank as an opportunity to underscore an argument they have been making since the 2008 financial crisis: that similar turmoil shows that the financial system is too centralized, which inspired the creation of bitcoin. But some tech investors believe that a repeat of bad behavior and overnight crashes in the cryptocurrency world has spooked the financial industry.

Silicon Valley Bank

The collapse of Silicon Valley Bank (SVB) continues to affect the crypto industry.

U.S. regulators closed Signature Bank, a large New York-based lender and a key lender to the cryptocurrency industry, on March 12 to prevent the banking crisis from spreading.

On March 11, USDC, the world's second largest stablecoin and pegged to the U.S. dollar, once "unanchored" fell below $0.87. USDC is a stable currency pegged 1:1 to the U.S. dollar, and its price is usually stable at around $1. The day before, Circle, the USDC issuer, stated that Silicon Valley Bank managed about 25% of USDC cash reserves, and $3.3 billion of the approximately $40 billion in USDC reserves remained in Silicon Valley Bank.

Cryptocurrency executives and investors who have endured a year of ongoing turmoil amid the panic over the sudden collapse of Silicon Valley banks have seized the opportunity to preach and criticize centralized banking.

'Taxpayers will not bear any loss'

On March 10, local time, Silicon Valley Bank collapsed after suffering a deposit run, becoming the second largest bank failure in U.S. history. Silicon Valley Bank is a small and medium-sized bank focusing on PE (private equity investment)/VC (venture capital) and technology-based enterprise financing, with an asset scale of US$200 billion.

On March 12, the Federal Reserve, the U.S. Department of the Treasury, and the U.S. Federal Deposit Insurance Corporation (FDIC) issued a joint statement stating that starting from March 13, depositors can withdraw all their funds, and any losses related to the bankruptcy of Silicon Valley Bank will not be covered. borne by the taxpayer. The FDIC's deposit insurance fund will be used to protect depositors, many of whom are uninsured due to the $250,000 deposit guarantee.

"We also announced a similar systemic risk exception for Signature Bank of New York, which was closed today by its state charter," the banking regulators said in a joint statement.

Depositors at Signature Bank will have full access to their deposits, the banking regulator said. "All depositors at the institution will remain intact. As with the SVB resolution, taxpayers will not bear any losses," the regulator said.

Signature Bank is one of the major banks in the cryptocurrency industry, second only to Silvergate, which announced its imminent liquidation last week. Its market cap was $4.4 billion as of March 10, according to FactSet. A securities filing showed that as of Dec. 31, 2022, Signature had total assets of $110.4 billion and total deposits of $88.6 billion.

The Ripple Effect of Decentralized Finance

In the Silicon Valley bank failure, stablecoins became the first to be affected. Stablecoin is a kind of cryptocurrency, and the price volatility of general cryptocurrency is relatively high, while stablecoins are usually backed by actual assets, so the price is relatively stable. Generally speaking, stablecoins are anchored to a legal asset, such as the U.S. dollar, to maintain their price stability.

Dollar Coin or USDC is a key pillar of the crypto market, fully backed by cash reserves and short-term Treasury bills. But of publisher Circle's roughly $40 billion in reserves, $3.3 billion is in Silicon Valley Bank.

Smaller stablecoins like DAI and Pax Dollar also fell from their pegs, signs of broader nervousness. So far, such concerns have not spread to the largest stablecoin, Tether, which is priced at $1. Tether has previously faced scrutiny over its reserves.

According to CoinGecko data, USDC has a circulating supply of about 41 billion tokens and a market capitalization of about $37 billion. 

Stablecoins like USDC come in many forms, some backed by cash and bond reserves like Circle. When investors move between cryptocurrency exchanges, they typically park their funds in stablecoins.

USDC’s drop has had a knock-on effect on multiple decentralized finance (DeFi) applications that allow users to trade, borrow and lend tokens, and often rely heavily on transaction pairs involving stablecoins.

Crypto firms try to appease users

Stablecoins aside, the broader cryptocurrency market also endured a painful week, with bitcoin swinging between gains and losses, while smaller coins were in the red.

Since November 2021, the cryptocurrency industry has emerged from a long rout that wiped $2 trillion off the value of digital assets and sparked a series of implosions involving the TerraUSD stablecoin, Three Arrows Capital hedge Funds and FTX exchange. Among them, TerraUSD Token (UST) attempted to maintain its value using a combination of algorithms and trader incentives involving sister token Luna, and the system lost $60 billion, leading to heightened regulatory scrutiny of stablecoins globally.

Still, cryptocurrency firms including Binance and Tether, the world's largest digital asset exchange, took to Twitter to try to reassure customers.

Binance CEO Changpeng Zhao tweeted that the company has no exposure and its funds are safe.

Paxos Trust, the issuer of Pax Dollar, and cryptocurrency exchange Gemini said they have no relationship with SVB. Tether’s chief technology officer, Paolo Ardoino, said in a tweet that Tether had no access to Silicon Valley Bank.

By comparison, bankrupt cryptocurrency lender BlockFi has about $227 million in accounts at Silicon Valley Bank, according to a court filing.

"Smells like smoke"


Amid the wide-ranging banking crisis, some crypto advocates have seized the opportunity to say that centralized finance (CeFi) is to blame. They are more bullish on an alternative financial system free from big banks and other gatekeepers, arguing that government regulators who have recently cracked down on crypto firms have sown the seeds of a bank implosion.

Cryptocurrency advocates see the SVB collapse as an opportunity to underscore an argument they've been making since the 2008 financial crisis: that similar turmoil suggests the financial system is too centralized, which inspired the creation of bitcoin.

But the blame goes both ways. Some tech investors believe that a repeat of bad behavior and overnight crashes in the cryptocurrency world has spooked the financial industry, setting the stage for a crisis at Silicon Valley Bank. In November 2022, FTX, a cryptocurrency exchange run by Sam Bankman-Fried, collapsed after a huge breach in its accounts was exposed.

The New York Times commented that the accusation game is a sign of factionalism in the technology industry. Hot start-ups and various industry trends come and go, and crises can be used to advance the agenda. With the collapse of Silicon Valley Bank, crypto advocates have accused the structure of the traditional financial system of sowing the seeds of instability. Some venture capitalists have blamed social media panic for triggering the bank run. Others blame the government for its economic policies, or the banks themselves for mismanagement and miscommunication.

As of now, SVB appears to have relatively little involvement in the crypto industry. Given the legal uncertainty surrounding much of their business, many large banks have historically resisted working with crypto companies.

“A lot of cryptocurrency startups have had a hard time joining SVB,” said Haseeb Qureshi, a cryptocurrency investor at venture capital firm Dragonfly. “So our exposure is much less than expected.”

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