US Bank Collapses Signal Prospective CBDC Introduction?

CBDCs, Silvergate Bank, Sillicon Valley Bank, USDC, Circle, everything seems to be interlinked. With everything collapsing, something else must be on the come up, but what is it?
by Yoaquim Boom
March 10, 2023

US Bank Collapses Signal Prospective CBDC Introduction?

  • Sillicon Valley Bank Collapse
  • Silvergate Capital Collaps
  • Major Stablecoin USDC holdings at Silvergate
  • The possibility of the global introduction of CBDCs

  • S&P 500 price analysis

Sillicon Valley Bank Collapse

Silicon Valley Bank's tumultuous journey took another turn on Friday when U.S. regulators made the decision to shut it down amidst financial instability and increasing withdrawals.

Fortunately, depositors with insured accounts will have access to their funds starting Monday morning.

As an institution that heavily caters to venture-backed tech startups, SVB's unfortunate fate was sealed when it declared on Wednesday that it had sold a portion of its portfolio, incurring a significant loss of $1.8 billion, while simultaneously scrambling to raise more capital.

The repercussions were swift and far-reaching, with parent company SVB Financial's shares plummeting 68% in pre-market trading, leading to their suspension early Friday.

To make matters worse, VC firms had advised their portfolio companies to withdraw funds from the beleaguered bank, exacerbating the financial instability.

The impact of this upheaval extended beyond SVB, as America's four largest banks - JPMorgan Chase, Citigroup, Wells Fargo, and Bank of America - collectively lost a staggering $52 billion in market value on Thursday.

The events of the past few days have been a sharp reminder of the fragility of the financial system and the interconnectedness of the various players within it.

The bankruptcy of Silicon Valley Bank (SVB) could potentially cause contagion in the banking industry and even lead to a banking crisis.

This is because the failure of one financial institution can have a ripple effect on others, especially in a highly interconnected financial system.

As a bank that heavily caters to venture-backed tech startups, SVB's bankruptcy could result in the loss of confidence among investors and depositors.

This could lead to a "bank run" where depositors start to withdraw their funds en masse, creating a liquidity crisis for the bank. If this happens, SVB could struggle to meet its obligations, such as repaying loans or honoring depositor withdrawals.

The impact of this liquidity crisis could extend beyond SVB to other financial institutions that have exposure to it. These institutions may be forced to write down the value of their SVB-related assets, which could result in significant losses.

Furthermore, if other banks have also lent to the same tech startups that SVB caters to, the bankruptcy of SVB could lead to a chain reaction of defaults, causing a broader banking crisis.

The potential for contagion is further heightened by the fact that the banking industry is highly interconnected. Banks rely on each other for funding and liquidity, and the failure of one bank could create a domino effect that spreads across the entire system.

Silvergate Capital Collapse

Silvergate Bank, a major player in the world of cryptocurrencies, has announced plans to wind down its operations and go through a process of liquidation.

The holding company for the bank, Silvergate Capital (ticker: SI), made the announcement on Wednesday afternoon.

According to a news release from the holding company, the liquidation plan includes the full repayment of all deposits. Furthermore, most deposit-related services will remain available while the bank is in the process of shutting down.

This news is sure to send ripples throughout the world of cryptocurrencies, where Silvergate Bank has been a trusted institution for many investors.

The bank has built a reputation for being reliable and secure, which has made it an attractive option for those looking to invest in digital assets.

However, it seems that Silvergate Bank's decision to wind down its operations is part of a larger strategy.

The bank has been focusing more on its digital currency services, and it's possible that this move is intended to streamline its operations and better align with its strategic goals.

Despite the news of the bank's impending closure, there is some reassurance for customers. The full repayment of deposits means that investors can rest easy knowing that their 'funds are safe'.

Additionally, the continuation of most deposit-related services during the liquidation process should make it easier for customers to transition to other financial institutions.

, a major issuer of the stablecoin USDC, recently disclosed that a portion of its 1-to-1 backed stablecoin was held at Silvergate Bank. However, the potential impact of this on USDC will be discussed later.

Overall, it remains to be seen what impact Silvergate Bank's closure will have on the world of cryptocurrencies.

However, it's clear that this is a significant development that will be closely watched by investors and industry experts alike.

Circle - USDC - And The Risk of Global CBDC Introductions

The recent crises at Silvergate and Silicon Valley Bank have highlighted the fragility of the financial system and the potential risks that come with it.

These events have brought to the forefront the importance of ensuring that the financial infrastructure is robust, resilient, and can withstand any potential shocks.

The failure of Silicon Valley Bank is particularly noteworthy, as it has the potential to cause significant disruptions in the cryptocurrency space.

This is because Circle, the issuer of USDC, a popular stablecoin, held a portion of its holdings on SVB and Silvergate Bank. If SVB goes under, there is a risk that USDC could depeg from the US dollar, leading to another major failure in the crypto space.

If such a scenario were to occur, regulators would undoubtedly be under immense pressure to address the issues in the stablecoin space and the broader cryptocurrency market.

The recent failures of Silvergate and Silicon Valley Bank are just the latest examples of the potential risks associated with the current financial system.

And to many regulators, having the entirety of the financial system under one umbrella, the government and central bank authorities is the only best option.

Essentially, a potential solution that policymakers may consider is the introduction of Central Bank Digital Currencies (CBDCs).

CBDCs are digital currencies issued by central banks that have the potential to revolutionize the way we transact and store value.

By introducing CBDCs, central banks would argue they can help mitigate the risks associated with the current financial system, such as counterparty risk and the potential for bank failures.

Furthermore, according to some regulators, CBDCs could also improve financial inclusion, as they could provide a safe, accessible, and low-cost alternative to traditional banking services.

This would be particularly beneficial for individuals and businesses that are currently underserved by the banking system.

In conclusion, the crises at Silvergate and Silicon Valley Bank have highlighted the need for a more robust and resilient financial infrastructure, but are CBDCs really the way?

There is a lot of risk to using CBDCs, as the population would leave their purchasing power fully in the hands of their governments.

It essentially would mean that all transactions will be recorded and tracked by the central bank. This raises concerns about individual privacy and the potential for government surveillance.

Although nonetheless, the potential failure of USDC, which is still completely in the air, and is certainly still unlikely as of now, could add to the urgency of the government's CBDC situation.

S&P 500 Price Analysis

After a short-term breakout of the frequently mentioned channel on the S&P 500, we faced rejection from the previous resistance zone around 4200. With current market news on banking, there has been a drop of over 4% in the last two days on the S&P 500.

Moreover, there is a relatively decent support level sitting at 3800, but little trust is put into it to hold. Instead, a new low is likely to be set, and a return to the blue indicated change, which has been followed since late 2021, is the most probable scenario amid market-wide fear and the Fed's likely continuation of interest rates for a while.

There seems to be no end in sight for either interest rate hikes or global inflation, wherefore continued downside should be taken into account.

Fig. 3 1D S&P500  (TradingView)