ChainReg 10: The SVB/Silvergate Edition
ChainReg 10: The SVB/Silvergate Edition
How today's bank run exposes more vulnerabilities in the system
Welcome to ChainReg Episode 10. The SVB/Silvergate edition. Today is March 10. The markets in the United States have closed. Anyone listening to this podcast knows that the core institutional financing foundation for the crypto sector is experiencing an old fashioned bank run.
Today’s podcast takes a data-driven approach to get past the headlines and identify the pressure points likely to emerge over the coming weeks as markets and policymakers scramble to stop a chain reaction from intensifying. Public policy is a key player in this drama. Their words trigger market action even as they respond to market meltdowns.
We use our PolicyScope language and quantitative data this week to highlight all the policy activity that missed media attention amid the liquidity situations at Silvergate and SVB. Those words matter because they set the stage for what comes next.
Anyone who has been listening to this podcast since January knows that liquidity for the crypto sector through traditional commercial banks has been under pressure all year.
Episode 1 caught the wave as U.S. federal banking regulators used their words to make it clear that regulated banks needed to exit their support for the sector.
Episode 7 highlighted how crypto market volatility creates downstream pressure for commercial paper markets.
The correlation between the crypto universe and the real economy is accelerating in all the wrong ways. This weeks’ developments make clear that crypto sector volatility and liquidity pressures are no longer contained to the blockchain. Real banks are now failing.
Financials in the United States and Europe are under pressure well beyond Silicon Valley even if they have zero exposure to crypto assets. Why? Because tight funding conditions for small companies paired with potential pressure on funding for larger companies in the commercial paper market and concerns about unrealized losses on bank balance sheets after nearly a year of rising interest rates means risk aversion will skyrocket in the near term.
Let’s look on the bright side. Market risk and liquidity stresses may help the Fed finally slow down a hot economy since repeated interest rate increases are not doing much to slow the labor market or consumption.
For many in the crypto sector, this is possibly the first financial crisis they have experienced. Many founders that were in at the early stages of crypto, during the Great Financial Crisis, will also be shaken. DeFi was supposed to be building a better financial system. Today’s bank run tells us that the billionaires backing blockchain behave just like all depositors when a bank experiences a down draft: they pull their funds. Panic selling is the same regardless of technological sophistication.
Buckle up, folks. If you though that FTX, Celsius, Terra Luna, Gemini, Genesis, etc. were a big deal, you were wrong. It’s safe to say that the digital currency ecosystem will never be the same again. Read on to see the signals you missed from Capitol Hill to Constitution Avenue (the Fed) to the Treasury Department.
Chart of the Week: Digital Assets
As much as we love our public policy data, there is only one chart that is relevant to the crypto industry this week. The stock price behavior for the Silicon Valley Bank (compliments of Yahoo Finance) tells a sadly familiar story and sets up a policy reaction function that will take months to unfold:
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