What happened
Three banks that served crypto businesses stopped operating within nine days.
On 8 March 2023 Silvergate Capital announced "its intent to wind down operations and voluntarily liquidate the Bank in an orderly manner", saying the plan "includes full repayment of all deposits". The same release notes it had already discontinued the Silvergate Exchange Network on 3 March.
On 10 March Silicon Valley Bank was closed by the California Department of Financial Protection and Innovation, with the FDIC appointed receiver. On 12 March the New York State Department of Financial Services took possession of Signature Bank, which held roughly 110.36 billion dollars of assets and 88.59 billion of deposits as of 31 December 2022.
That evening Treasury, the Federal Reserve and the FDIC issued a joint statement saying Silicon Valley Bank would be resolved "in a manner that fully protects all depositors", and announcing "a similar systemic risk exception for Signature Bank ... All depositors of this institution will be made whole." It adds that "Shareholders and certain unsecured debtholders will not be protected."
Circle disclosed that "The $3.3B USDC reserve deposit held at Silicon Valley Bank, about 8% of the USDC total reserve" was caught in the failure. USDC traded below one dollar over the weekend.
What it changes
The depeg is worth following carefully, because it is a lesson about what a dollar token is.
A stablecoin is not a dollar, it is a claim on a company that holds dollars at banks. A bank deposit is itself a claim, on an institution that can fail. When roughly 8% of the reserve sat behind a receivership of unknown outcome, over a weekend with redemptions paused, holders could not be certain of getting a dollar back, and the price stopped being a dollar. The chain of claims was always there. The bank failure just made each link visible.
The second change is the rails. Silvergate's network and Signature's Signet moved dollars between crypto firms around the clock, including weekends, which no ordinary wire does. Both are now gone. Settlement in dollars returns to banking hours.
What it does not change
Nothing on chain. Blocks kept arriving at the usual pace throughout, and bitcoin held in self-custody was unaffected by any of it, because it is not a claim on anyone.
It also does not make this a crypto failure in the way the sequence suggests. These were banks failing as banks, and the exposure ran outward: Circle's reserves were caught in Silicon Valley Bank, rather than crypto sinking it.
Context
The strain was visible in January, when Silvergate disclosed that digital asset deposits fell from 11.9 billion dollars to 3.8 billion during the fourth quarter of 2022, and that it "sold $5.2 billion of debt securities for cash proceeds", booking a 718 million dollar loss. That followed a year in which FTX, Celsius and Three Arrows failed and customers withdrew.
Few banks were ever willing to serve this industry, so the deposits concentrated in the ones that were. Which institutions provide these rails now, and whether anything replaces round-the-clock dollar settlement, are open questions this weekend does not answer.