The good thing about us writing this newsletter every other week is that we get breaks here and there. The bad news is that it’s just enough time for a handful of major banks to go belly up, and we have to find a way to distill the relevant information to you, our beloved reader, with finite time (and attention).

Buckle up, because we’ve got a doozy of an issue for you. We’ll be diving into the recent banking crisis that’s been rocking the crypto world, starting with the woes of Silicon Valley Bank and Signature Bank. Plus, we’ll explore how this chaos is affecting the wider industry, including the turmoil faced by stablecoins and the wild ride Bitcoin has been on lately. So, let’s dive into this financial frenzy and separate the facts from the FUD, shall we?

“Calc”-you-later, 🧮


P.S. To our 242 new subscribers, you sure know how to pick ’em. And by ” ’em,” we mean “the times to subscribe to a newsletter for maximum value.”

P.P.S. Don’t miss out on my “war room” discussion on Crisis-Mode Treasury Management for Crypto Companies on LinkedIn Live today at noon MST! I’ll be joined by experts from Bitwave, Dinara, and Franklin Templeton. If you’re a crypto company/project and recent events left you rethinking your treasury strategy, drop in on the discussion today and learn how to safeguard your cash in these chaotic times.

Crypto Banks Crash

If this is you, we’ve got you covered. Basically, all the banks with “Si” – Silvergate, Silicon Valley Bank, Signature, and…Credit Suisse – collapsed. Rather than go too deep on any one story, we’ll keep it high-level and give you only the most relevant information.

#1 – Silicon Valley Bank

First, let’s talk about Silicon Valley Bank (“SVB”). The story feels like old news at this point since so much has happened since then, but it’s worth understanding because it’s reflective of the overall banking crisis.

Long story short, Silicon Valley Bank (“SVB”) was the leading bank for tech startups – as in, it banked 42% of 2022’s venture-backed tech and healthcare IPOs.

At the end of 2019, the bank had roughly $62 billion in deposits, which grew to $190 billion by the end of 2021. SVB put a significant portion of that cash into financial assets with the goal of generating a return on their assets – roughly $80 billion of which was in 10-year maturity mortgage-backed securities.

This wasn’t a bad deal at the time because the MBS products were yielding above 1.5%, whereas US Treasuries provided 0-0.25%. However, the funds used to purchase these assets were not the bank’s own but rather customer deposits. While this would not usually be a big issue, it could become problematic if many customers withdrew their funds simultaneously in a fractional reserve banking system.

The Fed kept saying it wouldn’t raise rates, but then it abruptly changed course and began raising rates at the fastest pace in history. The bank got stuck with low-yield long-duration bonds that are now under water. SVB announced it was trying to raise $3 billion to shore up its financial position, which caused depositors in the bank – mostly founders and VCs – to panic.

They began aggressively withdrawing funds from the bank, putting additional pressure on SVB to sell their underwater assets for liquidity to honor withdrawal requests. More withdrawals put the bank in a worse financial position, which led to more people wanting to withdraw, which meant selling more assets at a loss, which turned into a death spiral — ultimately ending with the California Department of Financial Protection needing to step in.

#2 – Signature

Meanwhile, while everyone was losing their minds over the SVB collapse last weekend, the New York State Department of Financial Services quietly came in and shut down Signature Bank – the last major crypto bank standing.

At first, everyone assumed Signature Bank suffered the same fate as Silicon Valley: a “Risky Bet on Crypto and a Run on Deposits Tank Signature Bank,” as the New York Times headline phrased it. That would make sense, but there’s more to the story.

Barney Frank, former Congressman and the “Frank” in the Dodd-Frank Act, was a board member at Signature Bank and suspects the bank was shut down for political motives. Frank insists that Signature was not insolvent and didn’t need to be shut down. He also points out that the Department of Financial Services in New York has never said it was insolvent. So, if it wasn’t insolvent, why shut it down?

Frank said in his interview with Jen Wieczner of NY Mag, “I believe it was probably to send the message that even though we were doing crypto stuff responsibly, they don’t want banks doing crypto.”

It gets weirder. Reuters reported on Wednesday that “any buyer of Signature must agree to give up all the crypto business at the bank.” The FDIC promptly denied this claim, but in its press release announcing the sale of Signature Bank’s assets to New York Community Bancorp’s Flagstar Bank, N.A., stated that the crypto business wasn’t part of the sale:

“Flagstar Bank’s bid did not include approximately $4 billion of deposits related to the former Signature Bank’s digital-assets banking business. The FDIC will provide these deposits directly to customers whose accounts are associated with the digital-asset banking businesses.

I want to be careful not to jump to conclusions, but is it possible that the US government just shut down a regulated financial institution holding over $100 billion in deposits simply because it didn’t like it?

The Blockchain Association just submitted a list of similar questions under the Freedom of Information Act to the Fed, FDIC, and OCC.

Contagion Containment…or not

Reprieve eventually came in the form of a joint statement by the Treasury, Fed, and FDIC the Sunday following SVB’s collapse, stating that depositors would have access to all of their money starting Monday, March 13. Problem solved, right?

Turns out, Silvergate, SVB, and Signature were just the tip of the iceberg; the bigger story was just beginning to unravel. What many initially perceived as a crypto banking problem quickly evolved into widespread panic and concerning outflows across hundreds of regional banks. While Silicon Valley Bank may have done a particularly poor job of managing its asset and liability duration mismatch, it wasn’t the only one facing a liquidity crisis.

How did all these banks convince us they were solvent, you ask? Accounting tricks. Under current accounting standards in ASC 320, Investments-Debt and Equity Securities, bonds that are held-to-maturity are not required to be measured at fair value on the balance sheet. In other words, all these banks racked up massive unrealized losses on their long-dated low-interest-rate bonds, but they weren’t reflected on their balance sheets because they were classified as held-to-maturity (AKA “hide-to-maturity”) instruments.

What’s worse is the Fed saw this coming and wrote about it back in September of 2022, stating:

“At June 30, 2022, the Tangible Equity Capital Ratio at CBOs fell to 8.7 percent as a result of mounting unrealized losses on AFS securities, which totaled 1.5 percent of average assets. At year-end 2021, only 4 community banks had tangible equity capital ratios below 5 percent; that number increased to 333 at June 30, 2022, indicating less ability to sustain economic shocks.”

Translation: “banks have a crazy amount of unrealized losses, and 333 of them are probably insolvent.”

In a recent speech, FDIC Chairman Martin Gruenberg admitted that “the total of these unrealized losses, including securities that are available for sale or held to maturity, was about $620 billion at year-end 2022.”

The Wall Street Journal confirmed these frightening statistics in a recent article, stating that 186 banks may be prone to similar risks as SVB.

Not a Bail Out

To prevent a widespread banking crisis, the U.S. Federal Reserve created a new backstop facility reportedly worth $2 trillion to “help assure banks have the ability to meet the needs of all their depositors.” Questions immediately arose as to which banks were eligible to tap into this liquidity – was this only for the “too big too fail” banks? If so, what would keep depositors from moving their funds from community banks to large banks whose deposits are 100% insured?

Senator James Lankford posed the question to Janet Yellen in a clip that founds its way circulating through the web:

“We have seen the mergers of banks over the past decade. I’m concerned you’re about to accelerate that by encouraging anyone who has a large deposit in a community bank to say ‘we’re not going to make you whole, but if you go to one of our preferred banks, we will make you whole.'”

Let’s just say her response didn’t exactly inspire confidence. Neither did the events of this weekend.

During the weekend, UBS reached an agreement to acquire Credit Suisse for approximately $3.25 billion worth of UBS stocks. UBS had to step in after the $54 billion liquidity injection from the Swiss National Bank proved to be insufficient.

The U.S. Federal Reserve sensed that the collapse of a 166-year-old bank might spook markets and released yet another press release that consisted of a single meme:

Ok, not really, but that’s what it sounded like: “We welcome the announcements by the Swiss authorities today to support financial stability. The capital and liquidity positions of the U.S. banking system are strong, and the U.S. financial system is resilient.”

And, as the icing on the cake, the Fed essentially just agreed to bail out foreign banks with Sunday’s announcement: “The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing a coordinated action to enhance the provision of liquidity via the standing U.S. dollar liquidity swap line arrangements.”

What the Banking Crisis Means for Crypto

Wow, that was a lot to take in. Now that we’ve got that out of the way, what does all this mean for the crypto industry?

1. Crypto banking looks bleak – in the U.S.

After the collapse of Silvergate Bank, Silicon Valley Bank, and Signature Bank, crypto companies are scrambling to find new banking partners. Not surprisingly, the major banks in the United States haven’t shown any eagerness to extend a warm welcome to homeless crypto businesses.

CoinDesk recently asked the top 20 U.S. banks if they were willing to onboard crypto clients, and most of them remained silent on the matter. However, according to crypto conglomerate Digital Currency Group (DCG), a few major banks are still in the running. Specifically, Santander (SAN), HSBC (HSBA), Deutsche Bank (DB), BankProv, Bridge Bank, Mercury, Multis, and Series Financial are still willing to connect with crypto firms.

If we don’t see more U.S. banks welcoming crypto deposits, we may see banking relationships move overseas, especially to Europe. In Europe, the Markets in Crypto-Assets Act (MiCA) provides regulatory clarity, which stands in stark contrast to the prevailing uncertainty in the United States.

As Silvergate’s problems unfolded, early signs suggest that the Euro may emerge as a significant beneficiary of the U.S. crypto banking clampdown. The BTC-EUR pair witnessed a substantial spike in volumes, with the bitcoin-euro pair attaining its highest-ever market share against the U.S. dollar. Its market share rose from 7% in November to 21% of BTC volumes last week.

2. Stablecoins were shaken

In the aftermath of the SVB collapse, Circle’s USDC stablecoin depegged considerably from its intended $1 price – a huge issue considering that it’s meant to be a safe place for investors to park their cash. USDC dropped all the way down to 87 cents before eventually restoring its peg. MakerDAO’s decentralized stablecoin also lost its peg and sunk to an all-time low of 88 cents.

While some might point to this event as justification to flee stablecoins forever, I’d argue that stablecoins like USDC appear much more stable (and transparent) than some bank deposits. In a recent Bankless podcast episode, Circle CEO Jeremy Allaire explained that, in the last six months, Circle moved 80% of its reserves exclusively to short-term t-bills in a strategic partnership with BlackRock.

With BlackRock, they created the Circle Reserve Fund, which is SEC-registered and supervised. Anyone in the world can pull up the USDXX ticker and see the exact composition of the reserves. The remaining 20% of reserves are held with BNY Mellon, one of the strongest cash infrastructures in the world. Good luck finding that transparency at a bank.

3. Bitcoin, back in action

Bitcoin witnessed an impressive surge last week, recording a 26% increase – its most significant weekly gain since April 2019. Propelled by the banking turmoil, the cryptocurrency has experienced a staggering 40% rise in just ten days – culminating in yesterday’s nine-month high.

Bitcoin was built for this exact moment. Satoshi Nakamoto created Bitcoin in direct response to the 2008 financial crisis. In fact, the very first block of Bitcoin had an inscription in the code: “The Times 03/Jan/2009 Chancellor on the brink of the second bailout for banks.”

While the Fed claims they aren’t bailouts, these loans are still “newly printed money” that increased the Fed’s balance sheet by $300 billion. In just one week, the Fed erased nearly half of all the QT it achieved over the past year.

Bitcoin is proving to be a “life raft” for investors during the current banking crisis. As governments continue to print money and central banks implement policies that devalue currencies, investors are turning to Bitcoin as a hedge against inflation and economic uncertainty.

In spite of the rollercoaster ride that the crypto community has experienced during this banking crisis, there’s a silver lining that we can’t ignore. In the midst of chaos, opportunity arises, and this turbulent period serves as a powerful reminder of why we’re so passionate about cryptocurrency and blockchain in the first place. The resilience and transparency offered by decentralized finance stand in stark contrast to the traditional financial system. So, while we may be navigating through rough waters right now, we’re on the cusp of forging a more robust, inclusive, and secure financial future. Keep the faith, crypto enthusiasts, because together, we’re building a new era of finance that can weather any storm.

The Water Cooler 🚰

Things worth talking about at the office water cooler…if you 1) talk to people, 2) still work in an office, and 3) have a water cooler.

Featured Funding Finds: Crypto funding events are still happening, people.

It may seem hard to believe given *gestures vaguely* everything, but there are still funding events and new partnerships happening in crypto. Although the two items we’re highlighting here happened earlier this month before things got really exciting, we still wanted to cover them here in the “F3” section. And since there’s already plenty to chew on in this newsletter, we’ll keep this short.

#1 – Proven closes $15.8M seed round led by Framework Ventures

What is this? Continuing the theme of “zero-knowledge (zk) is the way” from our last issue, Proven is all about using zero-knowledge tech to enable proof-of-solvency for exchanges, stablecoins, asset managers and custodians. This seed round (led by Framework Ventures with some help from Balaji Srinivasan, Roger Chen, and Ada Yeo) will inject fuel into their dev team and scale their existing zk tech infrastructure.

Why we noticed: Proven is far from the only company trying to respond to the post-FTX proof-of-reserve demand. But what they’re building is unique in its ability to use zero-knowledge for proof of assets AND liabilities, not just assets like other similar solutions. (We like to call that PoLaR – Proof of Liabilities and Reserves)

#2 – Toku – token-based back-office platform – raises $20M with Blockchain Capital

What is this? Toku is a DeFi tool suite offering (among other things) token-based payroll and tax compliance. You may also remember Toku by its former name, WorkDAO, whose DAO-focused employment and compensation services have been rolled into Toku’s current offerings.

Why we noticed: In our continued coverage of the “build-a-better-back-office” storyline, Toku stands out for its mission to help companies be tax compliant with token-based payroll and back office functions. Legacy compliance frameworks are not going to go away, and there’s not always a need to reinvent the wheel when it comes to finding ways to bring legitimacy to DeFi and crypto. Building a framework to help tokenized companies comply with existing regulations is a great place to start.

Other Significant Findings

Accountants and Auditors at “100% Exposure” to LLM according to new paper from OpenAI

TLDR – OpenAI researchers released a new study late last week on the potential labor market implications of burgeoning LLM tech (LLM=learning language model, the technology behind tools like ChatGPT). To read about it on Twitter, you’d think the key question behind this study is something like, “So how likely is your job to be replaced by AI really?” But surprise surprise, that’s not (quite) what the study is asking.

The primary gist of the study is more a) of 1000 jobs surveyed, what are the key tasks required to do those jobs, and b) would access to a ChatGPT-powered system reduce how long it takes a human to perform a specific task “by at least 50%.” Of particular interest to us is the chart with different professions ranked by their “exposure” to LLM tech, where “exposure” basically means “how much of this job could be accelerated but not necessarily replaced by a GPT tool?”

And lookee there – accountants and auditors are ranked at 100%, aka “fully exposed.”

But again, to interpret the study correctly here, we shouldn’t say that 100% of an accountant’s job can be replaced by an AI. If we’re reading this correctly (and we think we are), this is saying that of the critical tasks of an accountant’s job, all of them could be sped up by at least 50% with help from an LLM tool.

So y’all can rest easy…for now. Heck, in the middle of busy season, maybe the idea of a tool that would reduce your workload completion time by 50% sounds nice.

Find the full paper here and a helpful Twitter thread about all of it here.

ChatTOM – Transaction Observation Monitor

Wanna know one accountant whose job will never be at risk of being replaced by AI?

That’s right. ChatTOM. Because he’s already a LLM, lovingly crafted specifically to test your crypto accounting knowledge.

We kid. This is, of course, Tom’s Transaction (aka ChatTOM – Transaction Observation Model), the section of Triple Entry based on a real-life Etherscan transaction, solved in real time by real Tom (real accountant, not actual LLM, tells great jokes about how to talk Minnesotan).

Will you test your crypto accounting knowledge by solving Tom’s Transaction?

Today’s Tom’s Transaction:

What is this transaction and how would you account for it? As always, you can write in with your response, tag us on Twitter, or comment live during a livestream! Answers for all Tom’s Transactions are revealed in the next entry.

Speaking of, the answer to last entry’s transaction is… Bot Pwnage!

We’ll leave the in-depth explanation to ChatTOM himself. 👇

Extraordinary Items

There’s gotta be some sort of correlation yet to be published about this, but we’d summarize it as “the worse things are, the better the memes get.”

Like what you’re reading? All of this can be yours.

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