The token universe: Is a bank crisis looming and how are tokens impacted?

Token Takeaways ✍️

✨ The recent failures of Silicon Valley Bank and Credit Suisse have raised fears of a possible global banking crisis. 

✨ The events relate to the Federal Reserve as the US central bank has been hiking interest rates and recently announced measures to reduce strain in global markets. 

✨ Bitcoin has already reacted to the events, but a global crisis would likely have a significant impact on the broader token space.

While the token economy is holding strong in 2023, some global banks are facing pressure. Silicon Valley Bank and Credit Suisse have both faced meltdowns this month, raising fears of a global banking crisis. Banks serve as the backbone of the traditional finance system. When they fail, the consequences can be significant. As the token economy represents an alternative to traditional finance, it is also affected by global banking issues. In this feature, we unpack the events and look at what may come next for the token space. 

Please note: Investing in cryptoassets is risky. Due to the volatile nature of the cryptocurrency market, investors run the risk of losing their funds when they make an investment. Returns from cryptoasset investing are not guaranteed, therefore users should always be aware of the risks. 

US bank collapses 🏦

The turmoil began to unfold in early March when Silvergate Bank revealed it would be winding down. Days later, Silicon Valley Bank’s stock plummeted 60% in a day on rumours it was facing a crisis. The bank’s clients then rushed to withdraw $42 billion in deposits, initiating a “bank run.”

Token tips: A “bank run” is a scenario where customers flock to withdraw their money from a bank in fear that the bank may be unable to repay deposits. 💡

US regulators shut down Silicon Valley Bank on 10th March in the second-biggest US bank failure in history. They also closed Signature Bank citing systemic risk to the banking sector. The US government then announced it would make Silicon Valley Bank’s depositors whole.

Customers line up to withdraw funds from Silicon Valley Bank. Until its collapse, the bank primarily served startups and technology-focused companies. (Source: David Paul Morris/Bloomberg)

Credit Suisse falls 🇨🇭

Other banks have fallen too. Credit Suisse, one of Switzerland’s largest banks, has also faced collapse. Its downfall followed a series of scandals and heavy losses in its share price. Swiss giant UBS announced it would acquire the 167-year-old institution on 19th March. 

In response, some have raised fears of a possible echo of the 2008 Global Financial Crisis, when banks fell after financing high-risk housing-related loans and the global economy entered a deep recession.

Token tips: A “recession” occurs when an economy is in a period of retraction rather than growth. The last major recession happened in the fallout from the 2008 Global Financial Crisis, leading to mass layoffs, business closures, and economic decline. 💡

How the Federal Reserve comes in 💵

The Federal Reserve, also known as “the Fed,” is the US central bank. It oversees the US monetary system and the US dollar, the world’s main reserve currency. 

The Fed has a major impact on global markets. In late 2021, it announced plans to hike interest rates and economic tightening measures to combat inflation. Today, the Fed’s funds rate is 4.75% to 5%.

Token tips: When the Fed turns to tightening and increases interest rates, it becomes more expensive to borrow money. In turn, this can impact the price of assets like gold and Bitcoin, as many investors sell investments to earn interest on their savings. 💡

Fed Chair Jerome Powell has maintained that the US central bank will hike interest rates to curb inflation since late 2021. This stance has had a big impact on the global macroeconomic landscape. (Source: Joshua Roberts/Reuters)

As interest rates have increased, borrowers have faced increased pressure to repay their debts. They include homeowners with large mortgages. Some banks have also faced difficulties due to their investments. In Silicon Valley Bank’s case, it became overexposed to US government bonds and mortgage-backed securities, which declined in value as interest rates rose. 

How the Fed has responded 📣

The Fed announced Silicon Valley Bank’s depositors would get access to their funds in a joint statement with the US Treasury and Federal Deposit Insurance Corporation to instil public confidence in the US banking system. 

Following Silicon Valley Bank’s collapse, the Fed also announced an initiative called the “Bank Term Funding Program” to ensure banks can repay depositors. It then announced a coordinated plan with global central banks to ensure the US dollar’s stability. However, these measures stand at odds with the Fed’s tightening policy, hinting that it could soon pivot on its stance.

While the Fed has maintained that the financial system is robust, recent events have sparked fears of further bank failures and bank runs. 

How do the recent bank collapses affect the token space? ⚡

The recent turmoil in the banking system has impacted the token economy. When Silicon Valley Bank failed, the USDC stablecoin briefly lost its peg to the dollar after its issuer Circle revealed it had deposited funds in Silicon Valley Bank. It recovered when Circle gained access to its full deposit. 

Token tips: As USDC is designed to follow the price of the US dollar, Circle holds $1 in reserves in banks for every coin it issues. 💡

Alongside Silvergate Bank and Signature Bank, Silicon Valley Bank was one of the most crypto-friendly banks in the US. The recent shutdowns have been described as a bad outcome for the token space. 

However, the events have also shone the spotlight on the token economy. Bitcoin was born out of the Global Financial Crisis and its creator Satoshi Nakamoto was critical of traditional banking. 

As Bitcoin has a fixed supply of 21 million, it’s frequently described as a “digital gold” that could be used to hedge against inflation. While inflation remains high and banks face pressure due to rising interest rates, Bitcoin’s narrative has been strengthened. The leading token has surged 40% since Silicon Valley Bank collapsed. 

Bitcoin’s pseudonymous creator Satoshi Nakamoto left a hidden message that read “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.” in Bitcoin’s Genesis Block when it launched in January 2009, referencing the failings of the banking system that were exposed in the 2008 crisis.

Balaji’s big bet on Bitcoin 👀

Balaji Srinivasan, an early Bitcoin proponent and a former executive at Coinbase, caught the attention of the token space when he commented on the crisis. On 17th March, he publicly bet that Bitcoin would hit a price of $1 million by June 2023. Srinivasan issued a warning that the US dollar could soon enter hyperinflation with the bet. 

While few token enthusiasts share Srinivasan’s view, his arguments have placed attention on tokens. For many crypto believers, token technology represents a pushback against banks and empowers people to allocate their capital like never before. 

The Fed announced another 0.25% rate hike on 22nd March. However, many believe that the bank could soon pivot on its stance. A Fed pivot would likely ease pressure on risk assets such as Bitcoin. 

Token tips: “Risk” or “risk-on” assets are assets that carry risk due to factors such as price volatility. While Bitcoin is frequently described as a hedge against fiat currency inflation, it’s widely considered a risk asset as it often performs in correlation with assets like gold and stocks. 💡

Balaji Srinivasan caught the attention of the token community when he suggested that Bitcoin could hit $1 million within 90 days due to the US dollar hyperinflating on 17th March. (Source: TechCrunch)

What happens next? 🔮

The Fed’s interest rate hikes have not gone unnoticed in global markets. The Fed maintains that it needs to curb inflation. But higher rates have partly contributed to events like the Silicon Valley Bank collapse.  

In a sense, the Fed is caught between a rock and a hard place. If it lowers interest rates, it may struggle to slow inflation. But if more banks fail, it may need to step in with further measures to ensure the public keeps confidence in the banking system. Lowering rates could impact the token space and potentially lead to renewed confidence in risk assets. 

It’s still unclear if any other institutions will follow Silicon Valley Bank and Credit Suisse. However, whether a crisis looms or further contagion is prevented, the events have exposed weak points in the traditional finance system. 

While banks serve a purpose for millions of people every day, they are not immune to failure. With the token economy, people now have an alternative way to save, take control of their assets and invest in the world around them. Though it’s hard to predict what happens next in markets, these events have served as a reminder of the unstoppable power of token technology. 

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