SPIRIT Blockchain – Weekly Wrap-up

Here’s what happened in blockchain and crypto this week.

 After the collapse of US lenders Silicon Valley Bank, Silvergate, and Signature Bank, contagion fears triggered a sell-off in banking stocks this week, particularly in US regional banks such as First Republic. Systemically important banks were not spared either. After Credit Suisse’s shares dropped to a new all-time low on Wednesday, the lender received a $54 billion loan from the Swiss National Bank to strengthen its liquidity. The ensuing flight to safety led to a rally in US Treasuries which had their best week since 2021. Given the concerns surrounding the banking sector, the market is now pricing in a 25 basis points hike from the FOMC on Wednesday next week. US inflation data came in broadly in line with expectations this week, with February headline CPI up 6.0% yoy but lower than in the 6.4% yoy in January. In contrast to the jitters in traditional markets amid fears over a looming banking crisis, cryptoassets had a strong rebound. The rally was led by Bitcoin which registered significant gains and traded up to almost $28,000 – its highest level since June 2022. The collapse of SVB also led to a temporary de-pegging in US dollar stablecoin USDC after its issuer Circle revealed that it had $3.3 billion in deposits with the lender. 

After the dramatic collapse of Silicon Valley Bank (SVB) spooked markets on Friday last week, contagion fears, concerns surrounding potentially uninsured deposits, and the unexpected shutdown of Signature Bank on Sunday rippled through the financial system last weekend. Fearing a wider spread of the crisis, the FDIC, the Treasury Department, and the Fed took steps to contain the situation, telling depositors in SVB and Signature Bank that the FDIC would protect all of their funds, including those that exceed the $250,000 limit on Sunday. On the same day, the Fed announced an emergency lending program to cover the deposits at issue and restore wider confidence in the financial system. A slew of media articles partly attributed the collapse of SVB and Signature Bank to the banks’ crypto operations. In reality, the recent turmoil in US banks are predominantly the product of poor asset-liability management, a challenging interest rate environment and a significant crisis of confidence in the banking system, particularly for smaller and more vulnerable regional lenders. 

On Sunday, New York regulators decided to abruptly shut down crypto-friendly Signature Bank – citing system risk – which caught the firm’s management and board members off guard, according to a Bloomberg report. The bank’s shutdown marks the third-largest bank failure in US history. Signature had 40 branches, assets of $110.4 billion, and deposits of $88.6 billion at the end of 2022, according to a regulatory filing. Signature Bank board member Barney Frank, a former congressman and creator of the Dodd-Frank Act, said the lender was shuttered in part to attack the digital asset industry. In a Monday interview with CNBC, Frank said that there was “no real objective reason” to shut down Signature and regulators targeted the bank to send an “anti-crypto message”.

The New York Department of Financial Services dismissed Frank’s claim, releasing a statement that the decision to place Signature into receivership “was based on the current status of the bank and its ability to do business in a safe and sound manner”. The FDIC later denied a Reuters report, according to which interested buyers in the now-defunct Signature Bank must also give up their ties to crypto. Meanwhile, US House Majority Whip Rep. Tom Emmer sent a letter to the Federal Deposit Insurance Corporation (FDIC) asking whether the agency has weaponized its authority in an attempt to “purge legal digital asset entities and opportunities from the United States”. 

Elsewhere, US dollar stablecoin USD Coin (USDC) broke its peg to the USD after its issuer Circle revealed that it had $3.3 billion in SVB exposure. After the news broke, USDC briefly traded down to $0.87 and did not reclaim parity until Tuesday after the US government backstopped all SVC deposits. USDC has seen net redemptions to the tune of $7 billion during the past 7 days, thus demonstrating that its redemption mechanism has worked flawlessly during times of market stress. USDC is a regulated and fully redeemable “crypto dollar” that is predominantly backed by short-term US government securities which are custodied with BNY Mellon, one of the most reputable US trust banks. 

Market Overview

The global cryptoasset market capitalization currently amounts to $1.22 trillion – up significantly from the $936 billion on Friday last week, with bitcoin accounting for 43.8%. Among the Top 30 cryptoassets by market cap, bitcoin (BTC) outperformed after gaining 36.5% over the week. The price of ether (ETH) rose by roughly 27% to $1,813. The total value locked (TVL) in DeFi is sitting at roughly $49.5 billion – with Ethereum (excluding Layer 2s) accounting for more than 59.5% of TVL.

This Week’s Headlines

·         Coinbase weighs setting up non-US trading platform, Bloomberg reports

• EU Parliament passes smart contract regulation under Data Act with potentially far-reaching implications for crypto
• SEC Chair Gensler suggests proof-of-stake (PoS) tokens are securities
• Fidelity Crypto goes live to the public, giving millions of users access to crypto 
• Ethereum Layer 2 project Arbitrum to airdrop its governance token with the ticker ARB next week
• US crypto bank Anchorage Digital cuts 20% of staff
• Binance converts $1 billion in BUSD to bitcoin, ether and BNB
• FTX paid around $2.2 billion to SBF, new management says
• Europol shuts crypo tumbler ChipMixer, seizes $46m in bitcoin
• Lending protocol Euler Finance loses $197 million after a flash-loan attack, exploiter returns $5.4 million 
• A new lawsuit accuses social media, and YouTube influencers of hyping FTX without proper disclosure
• Meta halts NFT plans for now to focus on other ways to support creators

Notable Deals and Fundraising

• Digital fashion firm DressX raises $15 million in Series A funding
• Stablecoin issuer CNHC raises $10 million in Series A+ funding
• Crypto infrastructure provider Orbs raises $10 million in token round
• Brazil-based Web3 gaming studio Jungle raises $6 million in a seed funding round
• Social recovery tool project Soul Wallet raises $3 million
• Blockchain infrastructure developer Smooth raises $2 million in seed funding
• Paradigm funds auditing DAO Code4rena with a $6 million token purchase
• Crypto wallet infrastructure startup Capsule emerges from stealth with funding from Andreessen Horowitz
• Defiance Capital completes first close of $100 million liquid token fund
• Ledger’s former chief of staff is raising up to $25 million for an NFT art fund
• Innovation-focused fund manager Ark Invest raises more than $16 million for a new crypto fund

Manuel Trojovsky, Head of Crypto Investments & Research

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