The ripple effects of the failure of SVB have been felt drastically within the tech industry, with few companies more exposed than the digital asset firm Circle. Nearly $3.3 Billion of USDC’s cash reserves were deposited at the bank. Investors, unsure of the implications, began liquidating their USDC, with the stablecoin briefly losing its dollar peg. Eventually, regulators would step in to guarantee all deposits at the bank, including those over the FDIC deposit insurance threshold of $250,000. But by then the damage had been done, and the turmoil sparked greater concerns as to the stability of the sector throughout the United States.
In response, Circle’s Chief Strategy Officer Dante Disparte joined host Dr. Chris Brummer on the Fintech Beat podcast to discuss the potential implications of the week’s events and how US regulatory authorities should respond to the demise of the three S’s – Silicone Valley Bank, Silver Gate Bank, and Signature Bank.
To begin with, Disparte was quick to dispel rumors about Circle’s flight-to-safety model. He explained how the company was more “conservative than what regulatory standards allow us to do with permissible investment rules for state money transmission.”
During the weekend Circle worked hard to ensure that they retained investor trust over keeping the one-to-one dollar parity. One of the ways through which they achieved this was through broad and transparent public announcements. The company went to great lengths, even announcing that if the $3.3 Billion exposure to SVB could not be completely de-risked, the company would pledge its total net worth against it to make all coin holders whole.
For many observers, the havoc wrecked by SVB’s collapse was concerning, as well as ironic. For years, traditional financial institutions have been arguing that digital assets export risk to the banking sector, but the tables have now turned. According to Dr. Brummer, the need of the hour is, “a reset or reevaluation as to how to best address both traditional and new risks.”
Looking across the Atlantic, Disparte pointed towards European legislation as inspiration. Current legislation is now paving the way forward in how federal oversight of payment-stable coins is being carried out. There are currently two frameworks, MiCA (the Markets in Crypto-Assets Regulation (MiCA) and PISA (the payment instruments, schemes and arrangement), which are regulating crypto at a macro level in Europe. PISA with the European Central Bank also allows for financial market infrastructure, including payment stablecoins to enjoy direct access to the central bank, which in the US would translate to the opportunity of having dollar custody at the Federal Reserve.
The importance of this safeguard is evident. When Circle issued a public announcement about backing all USDC one-to-one, even with corporate assets if the need arose, the dollar peg rose from 88 cents to a dollar to 98 cents and eventually to 1 dollar. According to Disparte, it is therefore important for, “comprehensive oversight of the sector and comprehensive protections that are bidirectional to banks and fintech and digital asset companies in the United States.”
While weak federal oversight has been highlighted as a catalyst, Dr. Brummer was also interested in the Circle CSO’s thoughts on the unwillingness of most banks to work with digital asset companies or entities with ties to the digital assets industry. Of particular concern was the idea that prudential rules that limit exposure could end up creating more, not less risk when things go wrong: “I can understand why regulators want to make sure that you don’t expose banks to segments of the financial system that can create systemic risk, but on the other hand, it appears to be that certain kinds of measures can also create concentration risk that could end up introducing more systemic risk,” he said.
Replying to Brummer, Disparte was highly critical of the culture of holding the crypto industry as a scapegoat for the failures of the banking industry. He pointed out how guidance being received by banks across the country has been cryptic, which has resulted in the redlining of certain sectors. This in turn has led to too few banks banking in too large a sector, which can then lead to greater risks.
“We are in an environment as a country and as a planet where we need to promote innovation to get ourselves through a crisis. If you cannot rely on a sector of the economy that enjoys a taxpayer-born public backstop to bank dollars, then we have a bigger problem,” he said.
While the events of last week are likely to cast a long shadow, an appropriate regulatory framework seems to be the order of the day and it is one the Congress will now be rushing to deliver.