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SVB collapse sends ripples through the cryptosphere, warns Clyde & Co

The impact of the collapse of Silicon Valley Bank on the ‘cryptosphere’ –Chander Agnihotri of Clyde & Co asks how stable are stablecoins

Even as this article is being drafted, matters are quickly developing following the collapse of Silicon Valley Bank (SVB) on 10 March 2023. With reports suggesting this collapse could be the death-knell for the crypto world, some fundamental questions arise:

  1. What brought about the collapse of SVB?
  2. How has this impacted the ‘cryptosphere’?
  3. What are the possible implications for the crypto sector, both legal and more broadly?

What brought about the collapse of SVB?

On 10 March, SVB entered into receivership with the US Federal Deposit Insurance Corporation (a US governmental agency that supervises financial institutions and insures bank deposits), assuming control of its deposits.

At the time of failure, SVB was the 16th largest bank in the US, its commercial focus being upon lending within the tech sector, with much of its customer base being venture-backed start-ups.

On 8 March, SVB announced that it suffered significant trading losses and intended to issue more than $2bn in new shares, in an effort to shore up its balance sheets. According to reports, this is understood to have caused key venture capital firms to advise companies to withdraw funds, leading to a run on the bank, and ultimately resulting in SVB’s collapse.

How has this impacted the ‘cryptosphere’?

Much of narrative around the collapse has focused on the subsequent slump in the price of the stablecoin, USDC. USDC is the world’s second-biggest stablecoin, with a market cap of $37bn, and was pegged to the US dollar, previously offering stability in a sphere that is otherwise characterised by price volatility.

Following the collapse of SVB, Circle, the US company behind USDC, announced that it had $3.3bn of its reserves in SVB. USDC subsequently lost its $1 peg, falling as low as 86 cents. This naturally caused many to question how stable any ‘stablecoins’ actually are, casting further uncertainty over the entire crypto sector.

What are the possible implications for the sector, both legal and otherwise?

Since its brief low, Circle has announced that that the $3.3bn will be made available and a price recovery is underway. Further, on a closer look, it can be seen that Circle had adopted a diversified approach to its reserving of USDC. Therefore, despite featuring in many headlines, this could eventually be viewed as a story that highlights the failings of the traditional banking sector rather that any fragility within the crypto sector.

On the issue of how stable ‘stablecoins’ actually are, this largely will come down to the quality of reserving practices. Even if Circle is found to be beyond reproach, this incident is therefore likely to bring crypto companies back into the regulatory spotlight.

Further, parties will invariably have lost significant sums of money, whether as a result of involvement with SVB or the de-pegging of USDC (even if short-lived). As a result, the actions of directors and executives involved in key decisions and the representations made by these companies to their customers may come under some scrutiny as the dust continues to settle.

Contributed by Chander Agnihotri, senior associate, Clyde & Co

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