Rollercoast of events and high volatility marked the weekend

Over the weekend, the volatility skyrocketed with the newsflow revealing the USDC issuer’s exposure to SVB.
Rollercoast of events and high volatility marked the weekend

March 13, 2023 - The crypto market has faced intense volatility since the fears of a bank run contagion emerged with the shutdown of the Silicon Valley Bank (SVB) by US regulators due to poor risk management by the company on Thursday/Friday last week. Over the weekend, the volatility skyrocketed with the newsflow becoming even more negative as Circle, the issuer of the dollar stablecoin USDC, revealed that it had a significant amount of its reserves with SVB. As a consequence, the USDC depegged reaching US$ 0.87, or -13% depreciation.

However, in a joint statement on Sunday,  the US Treasury, the Fed, and the FDIC,  after consulting with President Joe Biden, said that the US Treasury approved FDIC actions  to fully protect all depositors at SVB, including Circle, reducing the stress in the market. At the same time, the Signature Bank, another crypto-friendly bank, shutdown was announced by regulators, but the depositors will be made whole under the FDIC action as well.  In our view, there was no other alternative for US authorities to avoid a contagion, as the situation escalated very quickly. The Signature Bank and stablecoins were even seen as potential beneficiaries from the demise of the Silvergate Bank a few weeks ago, but the reality has been ruthless.

Amid the rollercoaster of events this weekend and US$183mn of short positions liquidations, crypto critics have tried to blame the industry for this banking system crisis. The International Monetary Fund (IMF) made public on Monday a report on "Macrofinancial Implications of Crypto Assets" given to the G-20 in February during a meeting in India. The report warns G-20 nations that crypto assets could lead to banks losing deposits and curtailing lending. However, this crisis is more related to poor risk management by banks, and to the vulnerability of a banking system which relies basically on trust, than to crypto. In its essence, Bitcoin and the blockchain technology were created to avoid such problems. All in all, the demise of crypto-friendly banks, and the exposure of stablecoins weakness, may delay crypto adoption. Nonetheless, the crypto market has been showing immense resilience, despite all the recent negative events.

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