🏦 The USDC & SVB Situation Explained

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Gooood morning, Rainmakers! ☀️

As always, we have two captivating topics for you to dive into:

1️⃣ 🏦 The USDC & SVB Situation Explained

2️⃣ 🧑‍⚖️ Is ETH a Security?

Without further ado, it's time to…

Get liquid💧

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🏦 The USDC & SVB Situation Explained

The U.S. cryptocurrency firm Circle’s USD Coin lost its dollar peg. It fell to a record low Saturday morning after the company revealed it has nearly 8% of its $40 billion reserves tied up at the collapsed lender Silicon Valley Bank. USDC, by design, trades at $1, but it fell below 87 cents on Saturday, according to data from CoinDesk.

The sudden collapse of Silicon Valley Bank (SVB) has caused a significant stir in the finance industry. SVB was shut down by regulators last Friday, making it the most significant U.S. banking failure since the 2008 financial crisis. Regulators seized the bank's deposits after SVB was unable to raise the $2.25 billion needed to shore up its balance sheet.

So what caused the collapse of SVB?

The bank experienced a surge in deposits from 2019 to late 2022, growing from $61.7 billion to $173 billion, due to a liquidity flood prompted by the COVID-crisis. However, writing loans was not attractive, so SVB decided to park the excess liquidity in US treasury securities and similar low-yield risk-free notes.

As interest rates rose over time, these securities depreciated sharply. When customers learned of SVB's overexposed position, they came running for their cash. SVB suddenly needed to come up with their client's funds while their client's cash was parked in depreciated fixed-income securities.

One of those clients being Circle. Circle is a financial technology company that was founded in 2013 with a mission to make sending and receiving money as easy as sending an email. In 2018, Circle introduced USDC, a stablecoin pegged to the US dollar, as a way to facilitate faster and cheaper transactions on the blockchain. USDC has since become one of the most widely used stablecoins in the cryptocurrency industry, with a market cap of over $30 billion and millions in volume per day.

Following the FDIC's intervention on March 10th, USDC holders connected the dots between USDC, Circle, and SVB, causing holders to panic sell their USDC and depegging the stablecoin. On March 11th, Circle confirmed some USDC reserves were held with SVB. However, the reserves backing USDC affected only comprise about 8% of assets, with $3.3 billion of their $40B+ in USD reserves being held by SVB.

Circle has confirmed that it holds a total of $9.7 billion of its USDC reserves in cash and $32.4 billion in short-dated government securities. Some of these reserves are held at other banks, such as Bank of New York Mellon Corp. and Customers Bank. In addition, Circle has confirmed that it has no exposure to Silvergate Capital, a crypto-focused bank that recently shut down.

It's worth noting that the U.S. Treasuries backing USD Coin is held by Bank of New York Mellon and managed by BlackRock Inc, according to Circle. This means that even if the situation with SVB continues to escalate, the underlying value of the stablecoin should remain intact, as it is backed by a combination of cash, short-dated government securities, and U.S. Treasuries and has minimal exposure to SVB.

Nevertheless, the situation with SVB has caused concern among USDC holders, with panic selling contributing to the coin's depegging from the US dollar. It remains to be seen how the situation will unfold in the coming days and weeks and whether SVB will be able to come up with the funds needed to address its clients' concerns.

🧑‍⚖️ Is ETH a Security?

The New York Attorney General has made a statement referring to Ethereum's native token, ETH, and other cryptocurrencies as "securities and commodities" about her lawsuit against the crypto exchange KuCoin. The attorney general claims that KuCoin has facilitated trading in several cryptocurrencies to residents in New York, where the platform is not registered as required by law. She added that the platform allows traders, including those in New York State, to "buy and sell popular virtual currencies, including ETH, LUNA, and TerraUSD (UST), which are securities and commodities."

This is significant, as it is the first time a regulatory official in the US has referred to ETH specifically as potentially being security for regulatory purposes. If the asset were to receive such a classification officially, it is expected to have far-reaching implications for the crypto industry. The scenario has long been feared in Ethereum circles, although it remains unclear exactly how it would affect the Ethereum project and the price of ETH.

The New York Attorney General's statement on the action taken against KuCoin indicates that this is part of a more significant effort to "rein in shadowy cryptocurrency companies and bring order to the industry." The attorney general is now seeking a court order that would stop KuCoin from calling itself an "exchange" and prevent the company from operating in New York via geo-blocking based on the "IP addresses and GPS location" of users.

If ETH is deemed a security, it could prompt federal regulators to take action against the significant crypto asset, according to Tonya Evans, a professor at Penn State University Dickinson Law. The implications of this statement are vast and could have far-reaching consequences for the crypto industry.

In the meantime, the Ethereum Foundation, which funds much of the development that happens on the Ethereum network, is not based in the US but is instead registered in Switzerland. Additionally, much of the trading in ETH and other altcoins happens on offshore exchanges that are not regulated in the US. Therefore, it is unclear how much of an impact this statement will have on the Ethereum project and the crypto industry as a whole.

This case highlights the need for clarity and consistency in the regulatory framework for cryptocurrencies in the US. While some officials have referred to bitcoin (BTC) as a commodity, the classification of other cryptocurrencies, including ETH, remains unclear. This issue will likely continue to be a topic of discussion in the crypto industry in the coming months, and it remains to be seen how regulators will ultimately resolve the dilemma.

💦 What else is Drippin’

This Week's Twitter Spaces: ⭐️Featured Community Members of March AMA⭐️

Our weekly Twitter Spaces are always packed with fantastic panels, and this week is extra special with our Featured Community Members of the Month! Each month, our team at STM selects engaged, driven individuals from our community to hand them the megaphone. The unique perspectives that have been voiced during these AMAs have been astounding!

The State of Security Tokens!

This year's edition is all about the most significant moves in the institutional adoption of tokenized assets, and let me tell you, it's MASSIVE. We've got all the heavy hitters you'd expect, like KKR and JPMorgan, but also some exciting new players like AllianceBernstein, Figure & Provenance, and Regulated Liability Network (RLN).

Trust us. You won't want to miss this deep dive into the world of institutional security tokens. So sit back, relax, and get ready to be wowed by all the action in The State of Security Tokens 2023 - Institutional Edition.👇

Everything in this report is for informational and entertainment purposes only. Nothing in this report should be taken as financial advice or as an inducement to purchase or sell any security. Nothing in this market report should be used as legal advice. Always do your own research before making any decisions regarding financial transactions of securities.

Disclosures:

• No money or other consideration is being solicited, and if sent in response, will not be accepted;

• No offer to buy the securities can be accepted and no part of the purchase price can be received until the offering statement is filed and only through the platform of an intermediary (funding portal or broker-dealer); and

• A person’s indication of interest includes no obligation or commitment of any kind.

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