Circle, Coinbase highlight instability, crypto concentration in 'TradFi'

Representatives for Circle and Coinbase blamed traditional financial institutions — 'TradFi' — for instability in the digital asset sector. 

“What happened over the last several days is a little bit of an ironic black swan situation where the contagion was not from crypto to TradFi, the contagion was TradFi to crypto” said Caroline Hill, senior director for global policy and regulatory strategy at Circle during a panel at South By Southwest.

The Circle policy advocate gave the company’s first spontaneous public remarks on the situation since its flagship product, the USDC stablecoin, went on a rollercoaster ride over the weekend, depegging from the dollar after three banks the company worked with failed in the five days.

La Jolla, Calif.’s Silvergate Bank announced it would begin a self-liquidation process on Wednesday after major losses related to its dealings with the digital asset industry, while regulators closed Silicon Valley Bank on Friday citing a massive bank run, and Signature Bank on Sunday “in order to protect depositors,” according to a New York Department of Financial Services announcement.  

Hill also cited announcements made by the stablecoin giant over the weekend that aimed to provide transparency with regards to where USDC reserves were held. 

"We’ve seen the market correct. But it is another reason why I think regulation is needed,” she said. “Ultimately we are a fully reserved model reliant on a fractional banking industry.” 

Events of the last week figure to further complicate relationships between banks and the digital asset industry. U.S. bank regulators issued multiple warnings about exposure to digital assets in the lead up to Silvergate’s troubles and demise, though a massive run on deposits fueled by a capital raise and jittery startup and venture capital customers led to Silicon Valley Bank’s failure. 

The future of crypto

A policymaker who played a key part in the creation of the European Union’s comprehensive digital asset framework acknowledged the complications that events of the past week could have on future policy for the industry. 

“Many banks say they will have nothing to do with crypto,” said Peter Kerstens, an adviser with the European Commission. “Some regulators don’t want anything to do with crypto.” 

Because few banks are comfortable with the asset class, there’s a limited number who do business with digital asset companies. That creates more risk for the crypto industry, argued Coinbase VP of Global Regulatory Policy Scott Bauguess. 

“Right now there’s lot of concentration of risk in the banking industry by crypto firms,” due to specialization, he said. 

As two banks, Silvergate and New York, NY.’s Signature Bank faced operational challenges, and Santa Clara, Calif.’s Silicon Valley Bank failed, that meant two of the main U.S. crypto banks were no longer available, while a startup and venture capital-friendly bank failure threatened to have broader repercussions for the global tech industry, including crypto. 

“What we’re seeing is TradFi has infected crypto, it’s been just the opposite,” of concerns about crypto affecting the traditional banking sector, Bauguess argued.