Digital Asset risk management in the wake of the Silicon Valley Bank collapse and USDC de-peg
Please note that the information provided in this blog post is for educational and informational purposes only. It is not intended as financial or investment advice, and should not be construed as such. Do your own research and consult with a financial advisor before making any investment decisions.
The Silicon Valley Bank collapse and Circle fallout
The recent news of Silicon Valley Bank’s (SVB) collapse has sparked concerns and debates around the safety of digital assets and the fallout that will occur from companies trusting SVB to store their fiat assets. However, it’s important to note that this is not a cryptocurrency problem but a bank failure. Nevertheless, this collapse does have implications for crypto companies, as demonstrated by Circle’s USDC being exposed to the bank’s collapse.
This highlights the importance of proper risk management practices for companies not only in the traditional finance space but any that are also holding digital assets.
The swift demise of the bank behind many startups and venture firms
Silicon Valley Bank (SVB) is a commercial bank primarily serving the technology and innovation industries, including a high concentration in startups and venture capital firms.
In March 2023, SVB experienced a liquidity crisis that resulted in the bank being unable to meet its financial obligations. This caused panic among the bank’s customers, who feared that they would lose access to their funds, leading to a bank run where customers withdrew over 42 billion USD worth of deposits, leaving the bank with a negative cash balance of 958 million USD.
The incident has highlighted the importance of risk management in not only the traditional finance space but also the digital asset space, especially for companies that rely on banks for their operations. While the collapse of SVB was not directly related to cryptocurrencies, it did have an impact on the crypto industry, as Circle’s USDC stablecoin was temporarily affected, leading to mild panic among holders of the stablecoin.
Here are some key takeaways from the incident and the impact on digital asset holders
Proper risk management saved Circle from failure
Circle, the issuer of USDC, had spread its 40 billion USD reserve funds across six banks, including SVB, where they had an exposure of 3.3 billion USD (or 8.25%). Though it will be painful for Circle, this diversification and risk management helped to limit Circle’s exposure to any one bank and reduced the impact of the SVB collapse on its operations.
Whether you’re relying on fiat, cryptocurrency, or a mix of both to fund your business operations, diversification is an essential risk management strategy for any company.
The importance of holding regulated and insured stablecoins
Circle’s USDC is a stablecoin that is pegged to the value of the U.S. Dollar and is regulated by financial authorities. USDC is also insured to ensure that holders can claim one unit of the stablecoin for one unit of the underlying asset, even if it means going to company assets. This regulatory oversight and insurance provide additional protection for investors and users of stablecoins, unlike unregulated stablecoins like Terra’s UST, which collapsed to nearly 0 USD in May 2022, never to return to the promised 1 UST to 1 USD value.
Unfortunately, this does not completely protect you from the short-term volatility of an asset on an exchange. At one point, the price of USDC dropped as low as 0.88 USD, as investors rushed to trade out of USDC in fear that another UST event was about to happen.
However, Circle has recently announced that it will likely have no exposure to the bank, given FDIC transfer regulations. Even if they cannot redeem the 3.3 billion USD stuck with SVB, Circle will guarantee all holders can redeem 1 USDC for 1 USD.
“We have reason to believe that under applicable FDIC policy, transfers initiated prior to a bank entering receivership would have otherwise been processed normally.
In such a case, Circle, as required by law under stored-value money transmission regulation, will stand behind USDC and cover any shortfall using corporate resources, involving external capital if necessary.”
Read more here: https://www.circle.com/blog/an-update-on-usdc-and-silicon-valley-bank
The importance of risk management within digital assets
“Do not put all your assets in one basket.”
For fiat currencies (i.e., USD, EUR, CNY, etc.), the most basic form of risk management is done by storing your assets in multiple reputable banks and multiple bank accounts within these banks. The most risk-averse companies will also hold their assets across multiple fiat currencies as well — imagine if you were a Russian company holding only the Russian Ruble in March of 2022. As we saw with Circle’s USDC, if one of the banks fails, you will feel the pain, but you will not be completely knocked out.
The cryptocurrency equivalent is to store your assets across multiple self-custodial wallets and/or on-chain wallets from licensed custodians, as well as holding multiple types of cryptocurrencies.
The benefits of multiple wallets
Similar to spreading your assets across multiple banks, companies and individuals looking to manage their risk exposure with digital assets may benefit from holding their digital assets in multiple wallets. This should ring-fence your assets in such a way that if one wallet is compromised, you will not lose all of your digital assets.
The benefits of multiple digital assets
Holding a mix of stablecoins (i.e., USDC, USDT, DAI, etc.) and volatile cryptocurrencies (i.e., BTC, ETH, ADA, etc.) will ensure that if one fails, you will not have complete exposure.
We see that most companies we talk to hold several regulated and audited stablecoins and a few of the top cryptocurrency tokens, like Bitcoin and Ethereum, to spread their risk across assets.
How Coinbag makes it easy to manage your digital asset risk
First and foremost, our thoughts go out to anyone negatively impacted by these events. In these unfortunate times, it is important to reflect, strategize and take action to ensure protection from future events, and we are always here to help.
Coinbag has taken our digital asset experience since 2015 and built a single platform to help companies and individuals effortlessly manage their digital assets across multiple self-custody and licensed custodian wallets.
Managing your digital assets with the Coinbag tools can provide an additional layer of protection against the risk of any one wallet or currency failing without adding the operational headaches of managing multiple wallets, private keys, and asset swaps across different platforms.
All within one, easy-to-use platform, you will benefit from the security of multi-signature approval for any transactions from your wallets, automated risk-managed rebalancing across your wallets to limit your exposure to any one asset class or wallet, and robust reporting that provides your finance and executive teams with a complete audit trail of every transaction on your wallets.
We’re here to help! Schedule a 15-minute demo of Coinbag
Contact us at: support@coinbag.finance
Or visit us at: https://www.coinbag.finance
Wrapping things up…
The collapse of SVB serves as a reminder of the importance of effective risk management not only in the traditional finance space but also in the digital asset space.
By diversifying across multiple banks, currencies, and wallets, investors and users can protect themselves from the risks associated with relying on single institutions or currencies.
Risk management is a serious thing that every company and individual should understand, strategize and deploy based on their financial goals.
Our thoughts go out to anyone negatively impacted by these events, and as always, we are here to help in whatever way we can.
Until next time,
Jeff | CEO & Co-Founder, Coinbag
Disclaimer
Please note that the information provided in this blog post is for educational and informational purposes only. It is not intended as financial or investment advice and should not be construed as such. Investing in financial markets carries a risk of loss, and you should always seek the advice of a licensed financial advisor before making any investment decisions. Any action you take based on the information provided in this blog post is at your own risk. The author of this blog post assumes no responsibility or liability for any errors or omissions in the content or for any actions taken in reliance on the information provided.
