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Winners and losers of cryptocurrencies after the bank run

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With the help of Mohar Chatterjee and Derek Robertson

We’ve been in turmoil for a week now this has forced central banks and regulators on both sides of the Atlantic to support their financial sectors.

This time around, the big financial headlines are (mostly) missing the word “cryptocurrency.” But if you look closely, this shake-up has already had all sorts of implications for the future of digital money.

Cryptocurrency is often seen as an alternative to the traditional financial system, but in fact it is still intertwined with it in every way, as this week’s events are reminiscent of.

So far, some forms of digital money have worked better than others.

Smoke may still be clearing from the smoldering ruins of a Silicon Valley bank and the financial world is still sorting itself out, but it’s not too early to announce some tentative winners and losers.

Here are five to keep an eye on:

LOSERS

American crypto industry —

First, the industry is running out of cryptocurrency-friendly US banks.

Last Wednesday, the same day that SVB reported its precarious financial condition, Silvergate Capital, long floundering and focused on cryptocurrencies, gave in and announced its closure.

On Sunday, two days after federal regulators took over SVB, banking regulators in New York shut down the cryptocurrency-friendly Signature bank (whose board member was believed to be former Massachusetts Democratic Rep. Barney Frank, an architect of financial reformers). Dodd-Frank 2010). .

There may be even fewer of them.

So far, everyone agrees that the financial system is largely insulated from the collapse of cryptocurrencies. Now that the banking system is under stress, the ability for crypto clients to create volatility in the level of bank deposits — flooding them with cash during a crypto boom and quickly withdrawing deposits during a crypto crash — is likely to attract new clients. examination.

The screws may already be tightened: story posted this morning, two unnamed sources told Reuters that any bank interested in acquiring Signature Bank — an FDIC-controlled process — must agree to drop crypto customers as a condition of any purchase. However, after publication, a spokesperson for the FDIC disputed this claim and stated that no such condition existed.

Circle — One of the contributors who own $3.3 billion worth of Silicon Valley Bank was the Boston-based stablecoin provider Circle.

For several months, there have been fears that a “crypto contagion” will spread from dubious digital assets into the regulated financial sector.

The events of the past week have done little to dispel those fears. But in Circle’s case, the infection spread in the opposite direction.

The failure of a regulated US bank has rocked the supposedly stable cryptocurrency token, which broke its peg and plunged to 88 cents on Saturday. Circle has since regained its dollar peg, but according to data from CoinMarketCap, there have been $6 billion in outflows in the last week.

So, depending on the day, the problem with crypto is either that it is getting harder to access US regulated banks, or that it has gained access to them and is now subject to their failures.

toss

Digital dollar —

Yesterday, the Federal Reserve announced the July launch of its FedNOW instant payment system, which is designed to allow users to send payments between bank accounts at the speed of a Venmo or CashApp transaction.

On the one hand, this upgrade could reduce the need for a more complete overhaul in the form of a central bank digital currency.

But few things create urgency like a bank run.

To date, the focus in the US has been on the development of a wholesale CBDC for use between banks. This is partly because many commercial banks don’t like the idea of ​​a retail CBDC. This could offer savers a way to bypass them and deal directly with the Fed. It can also, some banks claim, pose cybersecurity and privacy risks.

But as savers assess the risks of uninsured bank deposits, some commentators cite the appeal of a retail CBDC that would allow people to store money directly with the Fed.

WINNERS
tie
Bitcoin Maximalists –

The price of bitcoin has risen by about 20 percent in the last week. It was invented after the global financial crisis as a critique-computer code of the banking system’s relationship with governments.

Its biggest proponents, known as “Bitcoin Maximalists,” aren’t fans of the rest of the cryptocurrency either. They argue that most crypto firms that act as intermediaries between people and digital assets are recreating the flaws of the current financial system, and that both are doomed.

So, as intermediaries in both cryptocurrencies and traditional finance melt down, putting deposits at risk, people who say “not your keys, not your coins” start to sound a little more prophetic. And the digital equivalent of stuffing money under the mattress is starting to look a little less eccentric.

Tether –

The “bad boy” of stablecoins is back in business.

Two years ago, Businessweek devoted an entire cover story to the constant questions about exactly what assets back this token that underpins crypto finance.

Earlier this month It is reported by The Wall Street Journal. that the companies behind Tether falsified documents to obtain bank accounts, which the stablecoin issuer disputed.

So the turmoil in the markets should especially shake the credibility of Tether. Right?

Not really.

The good news for Tether at the moment is its limited dependence on US regulators and US banks.

The last time we reviewed the US stablecoin industry, a month ago, government regulators stopped the minting of new Binance-branded stablecoins by New York-based issuer Paxos. This resulted in an influx of $2 billion into Hong Kong Tether in less than two weeks.

This time around, as Circle’s dollar peg collapsed, money poured into its offshore rival worth $3 billion in a single day, according to CoinMarketCap, bringing its market cap to roughly $74 billion, where it still stands at press time after several felling days. .

At some point, Tether traded at a premium to the dollar. People were paying more than one real dollar — $1.03 on Saturday — for access to an offshore synthetic dollar based on the blockchain, which constantly faced doubts about whether it was secured enough to make all token holders whole.

At this rate, Tether may need to change its name to Teflon.

In hot pursuit GPT version 4 These are pretty important labor economics questions: namely, what does wide access to AI capable of (at least) creating complex language mean for the future of work?

This is a question faced by a group of technical economists. virtual mass event organized yesterday by Brookings Center for Regulation and Markets And AI, analytics and the Future of Work initiative at Georgetown University. Among the guests was Susan Athey, a professor at the Stanford Graduate School of Business. Athey was previously Microsoft’s chief economist and now holds the same position in the Justice Department’s antitrust division.

It was clear to them that the ability of generative AI to create human-like content can be explained by the fact that very large language models become really, Really good at pattern recognition. She said that part of what seems “magic” about these very large models is their ability to become “contextual” — for example, to take into account a certain writing style when generating an output. And this is partly due to the breadth of data that has been loaded into these models and the staggering size of these models.

“We have this big basic black box model that is incredibly good at pattern recognition. But getting inside and setting something up is not very easy. This thing works at scale precisely because it is versatile,” Eti said. When you connect other technologies (such as the Internet or special databases) to generative AI models, things get interesting. Referring to the GPT4-based Bing search engine, Athey said that using “pattern recognition along with other technologies” (such as calling a function to check if Bing search results link to real articles) is a practical and powerful use – cases will come.

However, in the shorter term, Anton Korin points to a new skill that workers need to become familiar with: operational design. Korinek is Professor of Economics at the University of Virginia and Head of AI Economics at the AI ​​Governance Center. He called operational design “mostly natural language programming,” a skill that will determine the quality of the results people can get from these generative AI systems. In the short term, Korine believes that large language models are “very useful” for automating “microtasks.” — Mohar Chatterjee

In some corners of Silicon Valley, this is taken for granted. that Washington is forever seeking to acquire them—seeking to stifle the diverse, dynamic force of innovation that has powered the digital revolution of the past few decades.

After one of the biggest financial crises in the history of the industry? Not so much. This was announced by Brendan Bordelon from POLITICO. this week about how, after the collapse of the Silicon Valley bank, “techlash” was decisively muted, and almost everyone agreed with the mutual interest that the bank’s depositors were healthy.

“The kind of animosity between David and Goliath that I think some of these tech moguls would like to establish [with Washington] “That’s not how it works,” Margaret O’Mara, chair of American history at the University of Washington and an expert on the interface between politics and technology, told Brendan. “That’s not how it works in practice, and that’s not what’s happening today.”

However, the federal government’s swift action on the SVB has not quite quelled the sector’s complaints of harassment. It simply shifted the targets: some argue that the “aid” itself was aimed at kill the crypto industryand updated wave of rage the Federal Reserve for raising interest rates. — Derek Robertson