The Bailout of Silicon Valley Bank
As quickly as the Silicon Valley Bank crisis came, it’s gone. The government has stepped in and promised to make depositors whole, effectively making this a bailout by another name. Here’s the important segment from the Treasury statement:
"After receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, Secretary Yellen approved actions enabling the FDIC to complete its resolution of Silicon Valley Bank, Santa Clara, California, in a manner that fully protects all depositors. Depositors will have access to all of their money starting Monday, March 13. No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer."
What Does Silicon Valley Bank Teach Us about Crypto
So what have we learned from this brief saga? First, it’s that system risk doesn’t only come from bad investments. By any measure, very safe investments, like putting your money into a top 20 bank, or a large bank holding government issued bonds, is considered extremely safe. The big takeaway from the downside is how important good portfolio construction is. SBV was in danger because they did not appropriately hedge their risk, not because the underlying asset was unsafe.
Extrapolating that lesson to crypto, it is not enough for us just to see the holdings of a centralized crypto exchange to know its secure. Proof of reserves is not enough, we need to be able to examine a full portfolio in order to sufficiently assess counterparty risk.
USDC and SVB
At this point, we likely all know USDC depegged because one third of their liquid holdings were in Silicon Valley Bank. Did you know when you bought crypto, you were buying into system risk held by a bank you’ve never heard of? I think the entire crypto industry needs to reflect on what is considered safe, and what risk is appropriate for the industry to take on. There’s all sorts of crazy financial instruments underlying our tokens, like loans for Tesla buildings.
Since the announcement, USDC has regained its peg, and is holding steady. Up until now, I’ve considered USDC and its transparent reporting to be the gold standard for stablecoins. Circle said they were working to backstop the losses, and I believe they would have been able to find backers, but it makes me wonder where the rest of their money is held and what risk management practices are in place.
Silicon Valley Bank’s Effect on Ethereum
This whole chapter caused turmoil for every cryptocurrency, but we saw something really interesting with Ethereum. The price aggressively crashed, and has since recovered just as aggressively. Sounds bad, right? It would have been bad back in 2021, but since The Merge, high volatility is a good thing for long term holders. ETH staking yield neared record highs, and stayed high throughout the whole weekend. ETH’s issuance rate is a straight line down, as the total supply changes since The Merge is -0.1%. It doesn’t seem like much, but if it was still a proof of work network, the Ethereum supply would be up 3.4%.