We're now a week into the turmoil that forced central banks and regulators on both sides of the Atlantic to prop up their financial sectors. For once, the big headlines about financial distress (mostly) don’t include the word crypto. But if you look more closely, the shakeup has already had all sorts of implications for the future of digitally native money. Crypto is often held out as an alternative to the traditional financial system, but in reality remains intertwined with it in all sorts of ways, as this week’s events served to remind. So far, some forms of digital money have fared far better than others. The smoke may still be clearing from the smoldering ruins of Silicon Valley Bank, and the financial world still sorting itself out, but it's not too soon to declare some provisional winners and losers. Here are five whose fortunes are worth watching: LOSERS The American Crypto Industry — For one thing, the industry is running out of crypto-friendly U.S. banks. Last Wednesday, the same day SVB revealed its shaky financial condition, the long-wobbly and crypto-focused Silvergate Capital threw in the towel and announced it was winding down. On Sunday, two days after federal regulators took over SVB, bank regulators in New York shut down crypto-friendly Signature Bank (which counted former Massachusetts Democratic Rep. Barney Frank, an architect of 2010’s Dodd-Frank financial reformers, as a board member). They could become even scarcer. The consensus so far is that the financial system has been largely insulated from the crypto meltdown. Now that the banking system is coming under stress, the potential for crypto-sector customers to create volatility in a bank’s deposit levels — by flooding them with cash in a crypto boom and rapidly drawing down deposits in a crypto crash — is likely to attract renewed scrutiny. The screws may already be tightening: In a story published this morning, two unnamed sources told Reuters that any bank interested in acquiring Signature Bank — a process being overseen by the FDIC — must agree to drop crypto industry customers as a condition of any purchase. Following publication, though, an FDIC representative contested that claim, and said no such condition existed. Circle — One depositor with exposure to Silicon Valley Bank, $3.3 billion worth, was Boston-based stablecoin provider Circle. For months, the fear has been that “Crypto contagion” would spread from dodgy digital assets into the regulated financial sector. The events of the past week will do little to allay such fears. But in Circle’s case, the contagion spread backwards. The failure of a regulated U.S. bank rocked a supposedly stable crypto token, which broke its peg and fell as low as 88 cents on Saturday. Circle’s since regained its dollar peg, but it’s seen $6 billion of outflows in the past week, according to data from CoinMarketCap. So, depending on the day, crypto’s problem is either that it’s getting harder to access U.S.-regulated banks or that it has accessed them and is now exposed to their failures. TOSS-UP A Digital Dollar — Yesterday, the Federal Reserve announced a July launch for its FedNOW instant payment system, which is designed to let users send payments between bank accounts with the speed of a Venmo or CashApp transaction. On the one hand, this upgrade could relieve pressure for a fuller overhaul in the form of a central bank digital currency. But few things create urgency like a bank run. To date, most of the focus in the U.S. has been on designing a wholesale CBDC for use between banks. That’s in part because many commercial banks do not like the idea of a retail CBDC. It could offer depositors a path to bypassing them and dealing with the Fed directly. It could also, as some banks argue, create cybersecurity and privacy risks. But as depositors assess the risks of uninsured bank deposits, some commentators are citing the appeal of a retail CBDC that would let people store money directly at the Fed. WINNERS
tether
Bitcoin Maximalists — Bitcoin’s price is up about 20 percent over the past week. It was invented in the wake of the Global Financial Crisis as a critique-cum-computer-code of the banking system’s relationship with governments. Its biggest believers, known as “Bitcoin Maximalists,” aren’t fans of the rest of crypto either. They argue that most crypto firms that act as intermediaries between people and digital assets are recreating the flaws of the existing financial system, and that both are doomed. So, when intermediaries in both crypto and traditional finance are melting down, putting deposits at risk, the kind of people who say “not your keys, not your coins” start sounding a little more prescient. And the digital equivalent of stuffing cash under your mattress starts to look a little less eccentric. Tether — The “bad boy” of stablecoins is at it again. Two years ago, Businessweek devoted an entire cover story to enduring questions about what assets, exactly, back this token at the heart of crypto finance. Earlier this month, the Wall Street Journal reported that companies behind Tether had falsified documents to get bank accounts, an allegation the stablecoin issuer contested. So turmoil in the markets should shake confidence in Tether especially hard. Right? Not exactly. The good news for Tether, at the moment, is its limited exposure to U.S. regulators and U.S. banks. Last time we checked in with the U.S stablecoin industry, a month ago, state regulators had halted the minting of new Binance-branded stablecoins by New York-based issuer Paxos. That led to $2 billion of in-flows to Hong Kong-based Tether in less than two weeks. This time, as Circle’s dollar peg broke, money flowed into its offshore competitor, $3 billion worth in a single day, according to CoinMarketCap, bringing its market cap to roughly $74 billion, where it still stands as of press time after several days of chop. At one point Tether was trading at a premium to the dollar. People were paying more than one actual dollar — $1.03 on Saturday — to have access to an off-shore, blockchain-based synthetic dollar that has consistently faced doubts about whether it has enough backing to make all token-holders whole. At this rate, Tether may have to change its name to Teflon.
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