An impending crisis looms over the financial sector as three of the largest banks in the United States have collapsed in one week, with more to follow as the trading of the stocks of over 30 banks halted on Monday. In response to the ongoing situation, cryptocurrency exchange Binance has decided to convert its $1 billion cash fund into various crypto assets.
Binance Converts Cash Reserves From Stablecoins To Crypto Assets
On March 13, Binance CEO Changpeng “CZ” Zhao went on Twitter to confirm the news. The Binance chief said his company is in the process of converting the remainder of the $1 billion Industry Recovery Initiative funds denominated in Binance USD (BUSD) stablecoin to native crypto assets like Bitcoin (BTC), Ether (ETH), and BNB. CZ claimed that Binance transferred $980 million worth of funds through the Ethereum network in under 15 seconds while paying a fee of only $1.29.
Binance introduced the Industry Recovery fund in November as an initiative to support and protect good players in the crypto sector who might be facing financial trouble in the short term.
The $1 billion fund was launched after the catastrophic collapse of disgraced former billionaire Sam Bankman-Fried’s fraudulent crypto empire, which included the FTX crypto exchange and hedge fund Alameda Research. The firms’ bankruptcies created a domino effect that hit many players in the crypto and traditional finance sector, including Silvergate Bank, a major banking institution in the U.S. that shut down last week.
The event led to Bitcoin dropping below $17,000, its lowest rate since 2020.
Binance had initially agreed to buy FTX’s U.S. assets to help the company but passed on the deal after finding irregularities in its financials. It was later revealed that FTX had been misusing customer funds to make speculative investments, which led to a mismanagement of over $10 billion.
The crypto industry has been facing scrutiny from regulators ever since the FTX debacle. Earlier this year, the U.S. Securities and Exchange Commission (SEC) went on a rampage to crack down on crypto-staking services and stable assets.
In January, the financial watchdog sued crypto exchanges Kraken and Gemini, alleging that the companies were offering unregistered securities to customers with their crypto staking-as-a-service and lending products. In February, the SEC ordered stablecoin issuer and crypto custodian platform Paxos to stop issuing Binance USD (BUSD) – the third largest dollar-denominated cryptocurrency in the market.
Banking Crisis Fueled By Increased Interest Rates And Market Collapse
Things started to get sour after the Federal Reserve’s interest rate hikes over the last couple of years to fight record-high inflation led to three major banks serving clients tied to the crypto industry facing a liquidity crisis on top of an already underperforming market.
It all started with Silvergate Bank announcing that it was preparing for liquidation after facing huge losses. The bank, which facilitated banking services for crypto companies, including FTX, allows clients to exchange fiat for cryptocurrencies through the Silvergate Exchange Network (SEN).
Crypto firms opened accounts with the bank to store their cash reserves. However, Silvergate’s relationship with FTX felt suspicious to customers who rushed to withdraw their funds from the bank.
The $8.1 billion withdrawal request was too much for the bank to handle as it had to sell off its assets at a loss to cover the liquidity hole. This created a ripple effect that led to Silvergate laying off 40% of its workforce and warning authorities that it may shut down due to operating at a loss. The bank also discontinued its payments settlements network. However, Silvergate has not declared insolvency and promised to return depositors their funds.
Crypto exchanges like Coinbase, Bitstamp, and stablecoin issuers Paxos and Circle were among the companies that cut ties with the bank. Silvergate’s collapse was a big blow to the industry, but what followed was much larger.
On March 10, 2023, a day after Silvergate’s announcement, Silicon Valley Bank, the premier banking institution for tech startups in the United States and the sixteenth largest bank in the country, declared insolvency. The bank, which had invested $80 billion worth of customer deposits into mortgage-backed securities, had to sell the investments at a $1.8 billion loss after facing a liquidity crisis due to the Fed’s high interest rates.
Panicked customers, which included companies like Circle and crypto lender BlockFi, rushed to withdraw their funds. The bank was overwhelmed by the $42 billion withdrawal request which was a quarter of its total deposits and forced to shut down. The U.S. government has since taken over the bank’s assets and promised to give depositors complete access to their funds.
Circle, the issuer of USD Coin (USDC) – the world’s second-largest dollar-denominated stablecoin – was the hardest hit by Silicon Valley Bank’s collapse. The company had $3.3 billion in cash backing its USDC reserves deposited in the bank. USDC investors were on high alert as they rushed to cash out on their holdings. It was reported that within 24 hours of SVB’s shutdown, $2.1 billion in USDC was redeemed.
The token lost its parity with the dollar, trading as low as $0.87 on Saturday. USDC reclaimed much of its value after the Fed announced a bailout program for the bank. On Monday, Circle confirmed it will be moving all USDC cash reserves to trusted financial institutions, once the funds were made available.
The free fall didn’t stop there.
On Sunday, Signature Bank, another bank well known for services offered to crypto-related companies, announced insolvency, making it the second bank to collapse within a week and the third largest banking failure since the 2008 financial crisis. The 29th largest bank in the United States facilitated crypto-to-fiat exchanges through its blockchain-based payments network called Signet, which was largely used by companies like Binance, Kraken, Paxos, and Coinbase.
Paxos and Coinbase confirmed that they collectively held nearly $1 billion in the troubled bank. Meanwhile, Kraken and Binance, who did not reveal their exposure, were already in the process of moving their holdings as part of the bank’s efforts to “diversify its portfolio” beyond crypto. Panicked depositors were offered some relief after the U.S. government took control of the bank and promised to honour all deposits.
Binance’s Move Lauded By Investors But Doubts Remain
Binance’s decision to move its cash reserves from stablecoin to decentralized crypto assets reveals how unsafe centralized cryptocurrencies are. The price of Bitcoin, Ethereum, and BNB rose in response to the news as investors were thankful that a fatal market collapse had been avoided.
However, doubts persist over the move, as many observers pointed out the danger of Binance holding reserves in its native crypto asset BNB. Similarities were drawn to Do Kwon’s decision to back his failed cryptocurrencies – UST and LUNA – with Bitcoin, and Bankman-Fried’s attempt to collateralize his company’s reserves in FTT.
Binance is also facing regulatory scrutiny for its operations in the U.S. The Cayman Islands-based company had allegedly been in control of all operations of Binance U.S., a subsidiary of the exchange that is supposed to serve customers in the United States and function independently of the parent company. According to various reports, Binance executives kept the information away from regulators to avoid enforcement action. The company is currently facing an investigation for the allegations, which CZ denies.
Binance, which is the world’s largest cryptocurrency exchange by trading volume, has crypto assets worth $74 billion under management.
At the time of writing, Bitcoin (BTC) is trading at $24,461 – up by 9.7% in the last 24 hours. Ethereum (ETH) is trading at $1,680 – up by 4.2%, and BNB is trading at $307.68 – up by 1.8% since yesterday.