The Block: Silvergate, Grayscale and USDC depeg: Three big stories this past week

There’s hardly ever a dull week in crypto, and this week was certainly no exception.

Silvergate was back in the news as the crypto bank’s troubles finally saw its doors close amid reverberations across the market.

That impact was also felt by the stablecoin USDC, which lost its peg to the U.S. dollar following the collapse of Silicon Valley Bank, the second crypto-friendly bank to fail this week.

Still, the Grayscale team was optimistic after a hearing over the Securities and Exchange Commission's rejection of the firm's application for a spot bitcoin ETF, one of the brighter notes in a tough week for the industry.

Let’s unpack:

Silvergate closes as crypto banking concerns spread The week started poorly for Silvergate, with shares down 6.1% on Monday after a bad month for the crypto bank.

On Wednesday, matters worsened as Silvergate Capital confirmed it was voluntarily liquidating the Silvergate Bank and winding down operations. That raised concerns that crypto firms’ access to the U.S. banking system would be further constrained.

By Thursday, the markets were plummeting, seeing Silvergate shares tumble 42.1% by market close. The crypto market followed, with bitcoin dropping to its lowest point in seven weeks, below the $20,000 level.

Concerns also spread into the wider banking market, with shares falling across the sector. Alternative crypto-friendly bank Signature fell 25% on Friday before trading was stopped. For Silicon Valley Bank, which also banked crypto firms, the news was worse, plunging 63% in pre-market trading before being halted after companies were urged to pull their funds. Later in the day, Silicon Valley Bank was closed by the California Department of Financial Protection and Innovation, and entered receivership.

A brighter note on the crypto banking front this week was that the crypto exchange Kraken is on track to launch a bank “very soon” despite a regulatory “weird place.”

USDC stablecoin depegs following SVB collapse The fallout from the collapse of Silicon Valley Bank, the largest bank to fail since 2008, then spread to the USDC stablecoin overnight, as it lost its peg to the U.S. dollar, dropping as low as $0.88 . The crypto market was frustrated with its issuer Circle over a lack of transparency surrounding its exposure to the bank.

In the absence of clarity from Circle, investors scrambled to exit their USDC holdings, swapping into alternative stablecoins like Tether’s USDT or exiting the crypto market entirely into fiat. USDC witnessed its biggest depeg since it launched in 2018. Its market cap dropped below $40 billion — a 15% decline in the last 24 hours, as $2.34 billion worth of USDC was burned, suggesting redemption for dollars.

That caused chaos across centralized and decentralized crypto exchanges alike. Coinbase and Binance halted USDC conversions. Meanwhile, USDT moved in the opposite direction, briefly spiking to $1.06 against the dollar on Kraken. Ethereum transaction fees jumped tenfold as USDC holders rushed for the exits. And other stablecoins like frax and DAI — also partly backed by USDC — depegged to similar levels.

As a fully reserved stablecoin, USDC is 100% backed by cash and short-dated U.S. Treasurys and is supposed to be redeemable 1:1. Circle was largely silent on Friday regarding exposure to the bank until confirming Silicon Valley Bank was among six of its banking partners, managing about 25% of total USDC reserves, but that didn’t do much to reassure the market. Finally, Circle confirmed late on Friday evening that $3.3 billion of its approximately $40 billion USDC reserves remained with Silicon Valley Bank.

USDC is currently trading at $0.91.

USDC/USD chart by CoinGecko

Grayscale CEO ‘encouraged’ after SEC’s argument questioned Crypto asset management firm Grayscale was optimistic following its day in court Tuesday in its case against the U.S. Securities and Exchange Commission over the rejection of the firm’s application to convert its flagship Grayscale Bitcoin Trust (GBTC) product to a spot bitcoin ETF.

Grayscale CEO Michael Sonnenshein said the company was left “feeling encouraged” as he walked out of the courtroom following oral arguments in the case, as Judge Neomi Rao questioned the regulator’s argument, though ruling on the case may take three to six weeks.

Sonnenshein broke down Grayscale’s strategy against the SEC on Thursday’s episode of The Scoop.

GBTC was buoyed following the news, albeit briefly, trading up over 10% by Wednesday as its discount to net asset value narrowed to 35.7% before the bitcoin exposure product fell alongside the rest of the market later in the week.

Elsewhere on the regulatory front, the Biden administration proposed a 30% tax on crypto mining and a closure to crypto’s wash-trading loopholes. Meanwhile, New York State Attorney General Letitia James sued KuCoin, saying the crypto exchange is an unregistered commodities and securities broker or dealer. Importantly, the suit also lists ether as being an unregistered security.

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