Author: Mr. X
Tl;dr – probably not. Slightly longer answer – when it comes to retail, it may very well be.
Crypto as a thing is not going anywhere. A good chunk of the industry has moved offshore as the regulatory hostility to it increases. Earlier this month, Ripple CEO Brad Garlinghouse said that because of the regulatory uncertainty surrounding crypto, the industry is leaving the country. “I’ve said it before, and I’ll say it again – crypto moving offshore is not good for American innovation,” he tweeted. “Period, full stop.”
Both Binance and Coinbase (COIN) are stopping USD Conversions because the stablecoin USDC is at risk due to the collapse of the Silicon Valley Bank. Binance said it was a “normal risk-management procedural step to take while we monitor the situation.” Coinbase stressed the “temporary” nature of its pause.
Yet Coinbase was a client of Silicon Valley Bank. Silicon Valley Bank also reportedly held some Coinbase stock, at least in the not-too-distant past. It reported that it made $116 million in 2021 because of Coinbase’s IPO.
Bitcoin’s price is relatively high on Coinbase right now, but that is probably less a function of demand than the fact that USDC is trading below its $1.00 peg. Coinbase suspended conversions over the weekend. As it stands now, many traders are ditching BTC for dollars on the spot market.
Still, crypto won an important legal victory this past week. Binance got approval from bankruptcy judge Michale Wiles to buy the assets of Voyager Digital. This came over the objections of the Securities and Exchange Commission. The Department of Justice may appeal the decision, as it is now investigating. Nontheless, if the decision is upheld, Binance strengthens its claim to be the last, best help for the crypto world. Binance also submitted reports that it could cover far more of Voyager’s creditors (more than 70%) than initially reported (just over 50%), which suggest Binance has more strength than anticipated. Of course, that was before last weekend.
The federal government is assuring the public that all depositors at Silicon Valley Bank will be able to get their money bank. If this proves to be the case, this should allow many of the startups and tech companies that were relying on the bank to meet payroll and calm the emerging crisis.
Signature Bank, a major leader in the cryptocurrency industry, was closed on Friday due to “systemic risk.” Depositors here too should have full access to their money. Signature had more than $110 billion in total deposits as of December 31. The Federal Reserve and the Treasury are now backing the deposits.
First Republic Bank looked like it might be the next domino to fall. It claims that it is getting support from JPMorgan Chase and the Fed. Unused liquidity is now reportedly more than $70 billion. Other regional bank stocks, including PacWest Bancorp, were down late last week. President Joe Biden is expected to address the nation this morning in an attempt to prevent a bank run.
Of course, even if the President is able to prevent a bank run, crypto is in its own unique situation. While the federal government will do everything needed to make sure the banking sector is stable, one suspects that few at the Treasury Department or the SEC would mourn if cryptocurrency goes down, so long as it does not infect the rest of the economy. Unfortunately for them, that moment probably passed a few years ago.
Circle, which backs USDC, said it had about $3.3 billion of the reported $40 billion in reserves at Silicon Valley Bank. USDC was below 87 cents for a short time on Saturday, though as of this writing it was back about 97 cents. If the federal government is backing full deposits beyond $250,000, this obviously includes Circle. However, it’s difficult to believe that the government will not use this opportunity to push for more regulation of cryptocurrency.
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What’s really happening is that the access ramps between cryptocurrency and the dollar are being destroyed, one by one. Gemini and JPMorgan Chase are reportedly no longer working together. Silvergate Capital announced it was liquidating its operations last Wednesday. FTX, of course, is going to trial. Cryptocurrency, after briefly flirting with institutional investors, is now being shoved back into the margins of the investment world. The sole exception is El Salvador, where it remains legal currency (for now), though the World Bank and other bodies can be expected to put pressure on the populist government of President Nayib Bukele.
Bitcoin is being reduced to what its proponents once argued would be its primary role – an alternative to fiat currency in an age of skyrocketing government debt. Ethereum will be driven by practical usage at this point, as people actually use it for various apps. Gold and silver are both rising as of this writing but the real question is how foreign nations, especially China and India, will respond to the dollar. Russia has long been pushing to dethrone the dollar as the center of the world’s international trade system. With the Fed possibly being forced to reverse course on interest rate increases because of this latest crisis, the case for the strong dollar has been undermined. If Bitcoin is ever going to prove its usefulness, it will be soon.
Unfortunately, it’s going to become a lot harder for casual investors to get a hold of it. Perhaps that is precisely what those in power want.
Mr. X is an investment analyst working in the Washington DC area who specializes in the intersection of business and public policy. After fifteen years working in politics, he writes on a classified basis for RogueInvesting.com to bring you news on what those with power are debating, planning, and doing.