crypto strategy

Silicon Valley Bank chaos has been bittersweet for crypto and wine

The collapse of Silicon Valley Bank earlier this month dealt a major blow to wine and crypto companies that entrusted their money and depended on the lender to stay afloat.

But it also gave the fine wine and crypto industry a big boost as panicked investors rushed out of the financial sector and into alternative assets.

Bittersweet Bank: SVB has loaned over $4 billion to winery customers since 1994, with over 400 wine industry customers (including wineries, vineyards and vendors) working with the top wine division of the bank’s range, according to the bank’s website.

Meanwhile, recent SEC filings indicated that SVB had about $1.2 billion in outstanding loans to high-end wine customers when the bank collapsed. These wineries will be able to get their money back, but what will happen to their lines of credit is still uncertain as details of the bank’s sale to First Citizens BancShares are clarified.

SVB also had strong ties to the crypto industry. Circle, the company behind the popular USDC stablecoin, said it has about $3.3 billion of its $40 billion in reserves at SVB. The company’s USDC coin plunged in value on news of the bank’s failure, though it has since recovered.

The collapse of Signature Bank, a major crypto lender, also had serious implications for the industry. The Federal Deposit Insurance Corporation (FDIC) recently told the bank’s crypto customers that they must close their accounts and transfer their money by April 5, as the deposits were not included in the bailout deal reached. with Flagstar Bank this month.

Still, Bitcoin jumped more than 4% on Wednesday, marking its best performance in more than a week. The coin is up 23% this month. A single piece now costs more than $28,000, its highest level since last spring.

Indeed, investors are worried about the security of the US banking system and are looking for a way to protect their money outside of it, crypto advocates said.

“Bitcoin and other cryptocurrencies are built on a blockchain in a decentralized structure that is not controlled by a single entity,” said Karan Malik, Web3 Strategy Manager at Legacy Suite. “The case for decentralization and cryptocurrency adoption became more valid after the banks collapsed.”

Cathie Wood, founder of Ark Investment Management, said in a tweet that the surge in crypto was unsurprising. “Their blockchains are decentralized, transparent and auditable. Banks are not, and in recent days have become less so,” she said.

Investment in fine wines also surged as investor confidence in the banking system was shaken.

“Fine Wine’s performance in different market environments demonstrates its ability to generate alpha and enhance risk-adjusted returns in a diversified portfolio due to its stability and low correlation to the stock market,” said Tom Gearing, CEO and co-founder of Cult Wine Investment.

The Knight Frank Wealth Report, an annual analysis from the real estate consultancy, found that 39% of ultra-high net worth individuals are likely to invest in wine this year.

“Interest in alternatives is on the rise and this is where wealth will rise over the next decade,” the report said.

Other safe havens such as gold surged in the wake of the bankruptcies of SVB and Signature Bank. The spot price of gold is now up 7.4% for the month, although it has stabilized in recent days. Silver is up 11% on the month.

And then: The market realizes that we are “entering a credit crunch and an earnings crunch and the recession that will cause the default cycle. We’re right in the middle of that,” said Mark Connors, head of research at Digital Asset. management company 3iQ in a note. “So as that happens, what assets are you going to go to?” He asked. “The 10 year [Treasury] is up, gold is up, the yen is up – and Bitcoin is up.”

So will the boom in alternative investments last?

Goldman Sachs estimated this week that households will be net sellers of $750 billion of stocks in 2023 and companies will buy $350 billion net of stocks in 2023, a 47% slowdown from 2022. This money has to go somewhere.

But the federal government, the FDIC and the Federal Reserve Bank have been working around the clock to assure investors and customers that the US financial system is safe. Alternative investments in crypto, wines, and metals, on the other hand, come with their own volatility and risk.

The Fed was without oversight leadership as SVB’s trade strategy went awry

The Federal Reserve went without a supervisory chairman for nine months between the fall of 2021 and the summer of 2022 – the same period when the “business strategy of the Silicon Valley Bank went wrong”, according to US Representative French Hill, a Republican of Arkansas, Wednesday.

The current Fed Vice Chairman for Oversight is Michael Barr, who was sworn in in July 2022 to replace Randal Quarles after leaving the post in October 2021. Barr told the House Financial Services Committee on Wednesday that he did not know not what had happened and who was in charge of monitoring during this interim period of nine months.

“I apologize, I don’t know the technical answer to that question,” Barr said when asked who was overseeing the banks at that time.

President Joe Biden did not immediately name a replacement for Quarles and the Fed had no plan to replace him in the interim, wrote Peter Conti-Brown – a professor at the Wharton School at the University of Pennsylvania and Brookings Fellow – soon after Quarles’ term ended. Instead, the Fed’s vital oversight and regulatory priorities were “managed by the Fed Board of Governors, through their committee structure,” Conti-Brown said.

Biden eventually nominated former Fed Governor and Treasury official Sarah Bloom Raskin for the role, but withdrew her name from consideration after she became embroiled in a controversy involving a Colorado fintech company. Biden finally nominated Barr in May 2022.

“It seems to me that we’re lacking in supervisory urgency here,” Hill said, noting that it took a full 12 months from when banking trends first raised concern among Federal Reserve reviewers to the when action was taken to correct them.

During this period without an oversight chair, Conti-Brown wrote, financial regulation and supervision were probably not at the forefront of Fed policy-making.

“I think you raise an absolutely essential question. It’s one of the things we’re going to ask for in our review,” Barr told Hill. “Should supervisors have been much more aggressive in how they reacted to the risk they noted? That’s something we’ll be looking at carefully.”

The collapse of Silicon Valley Bank and Signature Bank has caused weeks of turmoil and fear in the US financial system. On Wednesday, the House Financial Services Committee used its hearing to try to figure out exactly what went wrong.

According to Barr, there were several causes.

“I think any time you have a bank failure like this, the management of the bank has clearly failed, the supervisors have failed, and our regulatory system has failed,” Barr said during the hearing. “So we’re looking at all of that.”

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