951 days. That’s the longest span between U.S. bank failures since 1933. Before March 10, 2023, it’d been 867 days since the last U.S. bank couldn’t pay the piper. The closure of the Silicon Valley Bank (SVB) not only affected depositors but also had residual effects on the blockchain industry.
The closure of the bank affected over 37,000 small business owners that held more than $250,000 in deposits. Without intervention, these business owners would have no access to the funds needed to meet payroll. The domino effect would have real implications on the entire economy with businesses forced to lay off, furlough, or shut down their operations.
Luckily, on March 12, The Federal Reserve Board put together a plan to relieve stress on the economy by granting all eligible SVB depositors full access to their funds starting on March 13. That was a close one. Take us off the ventilators. After an anxiety-plagued weekend, it’s worth unpacking what happened and the truths that it puts in front and center.
Circle, the company that created the USDC stablecoin, held $3.3 billion of their cryptocurrency’s collateral in SVB. USDC’s 1:1 collateral backing is the true value proposition for the stablecoin, which attracts users looking for a cryptocurrency with less aggressive price swings.
Dogs bark, cows moo, and public knowledge that billions of dollars of collateral were held in limbo caused a frenzy. USDC’s price spiraled to under $0.90. The domino effect caused major players in centralized finance (CeFi) and decentralized finance (DeFi) to freeze stablecoin activity before things got too out of hand.
On March 11, Circle issued an update discussing the impact of SVB’s closure. USDC is fully collateralized with a combination of US treasuries and cash. They reported that 77 percent ($32.4bn) of their collateral is in short-term US Treasury Bills, while the remaining collateral ($9.7bn) sat in multiple institutions, including SVB. On March 9, getting word of the bank’s troubles, Circle initiated transfers to send their $3.3 billion to other institutions. The FDIC took control of SVB the following day. Circle believed there was a chance that their Thursday transfers could go through on March 13. Movies don’t always have happy endings. Before the government stepped in, Circle could have not gotten all its money back. It would’ve taken time to get even a fraction of their funds. Circle concluded the statement by assuring readers that they would do whatever it takes, including raising external capital, to protect the value of USDC.
This situation taught us a few things. One, there’s an inescapable impact that centralized institutions have on the blockchain industry, especially when it comes to fiat-backed stablecoins. The value of USDC and other fiat-back stablecoins are not tied to the exchange value of the US dollar, but rather the value of the US dollar within institutions that are susceptible to failure. Once an institution falls, you quickly realize that the value of the collateral is not the same as the value of USD in the broader markets. Not only is there a time risk involved in recapturing assets from failed institutions, but there’s a legit chance that you’ll never receive 100 percent of your funds back. A cryptocurrency stored on decentralized networks still had its fate handcuffed to a centralized bank headquartered in Santa Clara, California.
Secondly, we see in times of crises, decision-making partially reverts back to the mean of centralization. In the case of Aave, one of the trailblazers in DeFi lending, the protocol’s “guardians” recently froze activity on the Avalanche network for USDC and a set of other stablecoins. The discussion can be seen here and the actual code for the transaction can be seen here. Aave Guardians are special members of the governance structure that have the ability to do things like freeze activity on assets without the approval of the rest of the governance members. They also have the right to veto “malicious” governance proposals.
How does this affect what Thurman (our Discord) is building? Our company is building the largest group economics platform on the blockchain. Our first product is a blockchain-based business line of credit that serves black-owned small businesses. We know that there’s a real volatility risk that a business owner takes on when choosing to interact with cryptocurrencies for commerce or financial products. Using a stablecoin doesn’t shield you from every dart and arrow. We know that now better than ever.
Although USDC didn’t fall to zero, at its lowest, a line of credit originally worth $20k would only be worth around $18k. Those two-thousand dollars mean the world to a small business. Plus, the price drop didn’t strengthen our trust in an ecosystem that we haven’t fully dipped our toes into, yet. At Thurman, we believe that crypto markets are young and stablecoins like USDC are here to stay, but events like this make us think harder about the risks that our company and end users endure interacting with this ecosystem. Still, we believe that blockchain technology provides the best primitives to reach our vision of creating a global group of decision-makers with the collective goal of strengthing historically marginalized communities. Stablecoins are essential to creating this reality.
This isn’t the first or likely the last time that a stablecoin will de-peg from its target currency. There’s a lot of shit going on. Who knows what other institutions may crumble soon? Crypto-friendly Signature Bank failed on Sunday, too. In moments like this, we get a peek behind the curtain and gain clarity about the true game that we’re playing. One with lots of institutional influence and true trade-offs between decentralization and centralization. Either way, you’ve got to pay the piper.