Is the fallout from Silvergate and Signature Banks reducing market efficiency for Digital Assets?
March 2023 is turning out to be historic for markets and financial institutions as banks face liquidity issues due to effects of rising rates. Within a week, two banks known for having crypto clientele have been forced to shut down. Silvergate faced known balance sheet issues, but the shutdown of Signature has left even their board members questioning ulterior motives. How is this affecting the flow of digital assets?
The Loss of Real-Time Payment Rails Could Lead to Growing Price Discrepancies on Exchanges
SEN and Signet were Silvergate and Signature’s respective real time payment networks. These networks allowed two parties at the same bank to transfer funds 24/7/365 within seconds. Therefore, any institution with an account could deposit or withdraw from one of the many digital asset exchanges that also had an account within the network quicker than a more archaic method such as a wire transfer.
Crypto markets differ from equities markets in that multiple listings are common and many exchanges support spot trading for the same asset. Each exchange may have a different price at any given time, so market makers trade between each venue to bring prices closer together across all markets for a given asset. With the loss of real time payment rails, institutions will have to rely on rails that may not function outside of bank operating hours. This will lead to larger price discrepancies across exchanges.
Effects on the Stablecoin Industry and Beyond
Stablecoins have been drastically more volatile amidst the banking turmoil. This is mostly due to Circle’s exposure to the now-shutdown Silicon Valley Bank, but some of the volatility may last. Fiat backed stablecoins, like Circle’s USDC, are dependent upon banks and fiat payment rails to facilitate minting and redemption. Though USDC is backed by a strong balance sheet, the possibility of temporary depegging is increased during times when redemption or minting cannot be facilitated to meet strong forces in the market.
There’s been anecdotes of banks with crypto affiliated clients facing pressure from regulators. A shutdown of US banking activity for crypto clients entirely would cause tremendous shifts in the market as these clients would be forced to go offshore. Imagine a scenario in which USD, the current global reserve currency, cannot be deposited into an exchange and USD stablecoin issuers could only facilitate redemptions. Would USD continue to be the default quote currency for these markets? Probably not.
This article was prepared and written by Tommy and Taylor Johnson, who are the co-founders of PsyFi.io, a suite of open-source, accessible, and best-in-class financial tools and products that allow users to tailor investment strategies to investors’ risk/reward appetites.
Find Tommy on Twitter: https://twitter.com/tomjohn1028
Find Taylor on Twitter: https://twitter.com/NFTtaylor
PsyFi: https://www.psyfi.io/
