March sure was eventful! The crypto markets encountered significant challenges that highlighted the industry's complexities starting by seeing USDC depeg, raising concerns about the stablecoin’s stability and reliability. This strange occurrence was accompanied by high volatility in the stablecoin market having seen an increase of 47.5% to $823.2B in adjusted on-chain volume. The issued supply contracted by 2.3% to $125.5B, with USDT up to 64.1% and USDC down to 24.6% respective market share.
Meanwhile, Binance and its CEO, Changpeng Zhao (CZ), faced a CFTC lawsuit for alleged regulatory violations, creating uncertainty for the exchange and impacting the wider market. Finally, the collapse of Silicon Valley Bank revealed potential vulnerabilities in traditional financial institutions and raised concerns about the repercussions for the crypto ecosystem.
Overall, these events emphasised the need for robust regulation and vigilance in both digital and traditional finance sectors to prevent and insure against these types of occurrences.
Total Crypto Market Cap: $1.236T (+9.09%)
DeFi TVL: $50.6B (+2.41%)
Stablecoins: $131.96B (-2.21%)
Circle, the company responsible for the USDC stablecoin, recently admitted to a $3.3 billion exposure to the now-collapsed Silicon Valley Bank (SVB). As one of the most widely used stablecoins, USDC maintained its peg to the US dollar by backing each token with assets held by US banks, including SVB. The startup-focused SVB, which catered to the financial requirements of technology companies worldwide, faced the largest banking failure since the 2008 financial crisis. This collapse has left billions of dollars in retail, corporate, and investor assets stranded and raised questions about the factors contributing to its downfall.
SVB Financial Group, the parent company of SVB, revealed on March 8 that it had recently sold $21 billion in bonds, which led to a $1.8 billion after-tax loss. The bonds' average yield of 1.79% was significantly below the current 10-year treasury yield of around 3.9%. Simultaneously, SVB announced a $2.25 billion stock sale to bolster its finances. This announcement caused investors to panic, and within just 44 hours, they withdrew $42 billion from the bank, ultimately leading to its collapse!
Figure 1 - Available-For-Sale (AFS) Portfolio announcement by SVB.
Figure 2 - $SIVB stock price.
While poor communication, including tweets from venture capitalists (VCs), fuelled distrust and panic, the true cause of SVB's failure lies in its persistent poor risk management. Prior to the collapse, SVB lacked a chief risk officer, leaving it ill-prepared to handle the complex risks it faced. Furthermore, more than 90% of its client deposits were uninsured, making it highly susceptible to the risks associated with withdrawals.