Are we heading to a bank crisis in the US?

The fall of the Silicon Valley Bank came as a surprise to many. The Silicon Valley Bank is a 40-year-old bank in California that most venture-backed startups use. At its insolvency, it had about $209 billion in assets and was the 16th largest bank in the United States.

SVB is strong in the startup scene, and there are claims that it banked at least half of the US’s venture-backed startups.

They lured startups by offering attractive loans in return for these startups, using them as an exclusive bank. They had strong relationships with founders and VCs and offered them incentives such as attractive mortgage deals.

As is the policy, every bank must be insured. SVB was FDIC insured, but FDIC insurance only protects accounts that hold up to $250K. This did not work well for SVB as over 85% of the accounts had over $250K.

SVB faced massive growth as there was a spike in the number of deposits from 61 billion at the end of 2019 to 189 billion at the end of 2021. The increase in liquidity is due to fundraising avenues and different activities such as IPOs, venture capital investments, acquisitions, etc. That means SVB had many assets they needed to generate a return on. To generate a return while still investing in relatively safe assets, they decided to buy longer-dated securities such as treasury bonds and mortgage-backed securities. Unfortunately, this buying took place when rates were near record lows. By the end of 2022, SVB had over $120 billion in these securities versus only $74 billion in loans.

When the FED increased interest rates, it affected the VC landscape last year. There was less funding going to startups as the VC’s found it better to invest in bonds and government securities. This made deposits going to SVB decrease. This began a crisis as SVB had invested in long-term assets. SVB did not have interest rate hedges or proper risk management. Losses started piling up, and at the end of 2022, SVB had marked market losses on those securities over $15 billion, almost equivalent to its entire equity base of $16.2B. That means that if depositors want their money back, they will not have money.

They decided to compensate by making a share sale. When the news of the share sale went out, the stocks plunged. VCs then advised their companies to withdraw their funds from SVB. The startups and founders were in a scramble to withdraw funds.

Effect on Crypto

SVB collapse impacted Circle as Circle used them to bank the USDC stablecoin. UDSC is a fiat-backed stablecoin with an equivalent to the dollar. There were fears that it would fall off the hook. Circle announced that it has 3 billion out of its 40 billion reserves, about 8% of the amount.

A bank run?

There were fears that the SVB situation would lead to a bank run, as many banks have similar structures. There are many losses from fixed-income securities, which would affect their liquidity. For fear of a bank run, many started pulling funds from their accounts as no one was sure how fragile the US banking system was. The FDIC covers only 1.3% of their deposits, while the banking system has a total of $22 trillion. That means there were high chances of a bank run.

There are up to 65000 startups affected by SVB. If they cannot access funds, it may halt their operations, such as payrolls, making employees quit.

Unfortunately, bank runs do not discriminate on who the account holders are, and it may affect up to regional banks.

Increased interest rates have affected liquidity, leading to losses in bank balance sheets.

What does the future hold?

To rescue the situation, the FDIC and FED revealed working on a fund that will backstop deposits. The treasury Federal Reserve and the FDIC announced that they would be backstopping all the deposits at SVB so that customers could access their funds. This restored banking confidence and also helped Circle to recover. That was a brilliant move by the US government as there would be a wide-scale banking crisis.

The SVB crisis indicates that the fractional Reserve banking system is structurally unstable.

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Can Banks Steal your Money? The rise of bank bail-ins.

The financial crisis in 2008 was a game-changer in the financial industry. The housing bubble’s collapse led to bankruptcy, which affected even Wallstreet.

The U.S. treasury came in to rescue wall street by giving over 200 billion dollars in loans to hundreds of financial institutions. Even though it was a good amount, it was insufficient as it accounted for only about 30% of the total cost of bailing out the entire Financial system, which is estimated to be 700 billion dollars. Wall Street speculation was to blame though only one person went to jail, Kareem Sarah. The SEC allegedly destroyed the evidence given as part of the investigation. The bank bailouts are why Satoshi Nakamoto created bitcoin.

Financial crisis solution – Bail-ins

Politicians had a plan for new regulations. An example is the Dodd-Frank Act.

According to the Dodd-Frank Act, derivatives claims come first in the event of a financial collapse. That means that in the event of a financial crisis, derivatives debt owed by big banks will be paid off before anything else. The difference is that these debts won’t be paid off by bailouts but by bail-ins.

A bailout is when a big bank receives money from someone else to pay back its debts, while a bail-in is when a big bank uses its clients’ money to pay back its debts. It means the bank will use your deposits in accounts or money you lent it to pay debts.

Dodd-Frank Act opened the door to allowing big Banks to use their client funds to bail in themselves in a financial crisis.

The people in power had been working on alternatives to bailouts since 2008. The urgency to develop an alternative to bailouts increased after the financial crisis started to affect Europe.

In mid-2012, the IMF published a paper advocating bail-ins as the ideal alternative to bailouts. It, however, needed a ground to test out the bail-ins.

Cyprus – the testing ground

Cyprus was one of the European countries hit the hardest by the financial crisis. By the end of 2012, Cyprus was desperate for a bailout. In early 2013, the IMF and the European Union bailed Cyprus for 10 billion euros. The IMF gave Cyprus multiple conditions; one was for Cyprus’s largest bank to execute the first-ever bail-in. Almost 50 percent of all bank account balances worth more than one hundred thousand Euros were seized.

The United States was the first to legalize bail-ins in 2010. The Dodd-Frank Act pushed the U.K. to follow suit in 2013. With the financial services act, the E.U. legalized bail-ins in 2016.

Bank Bail-in laws tend to vary from country to country. Although the laws may differ, they follow the same three rules, likely because of their Collective Conformity with the FSB. The three rules are:

  1. Bank bail-ins are only allowed for banks that are deemed to be domestically or globally important.

This rule pertains to those with the most assets under management. The FSB publishes a list of globally important banks every year. There are currently 30 globally systemically important banks, with JP Morgan being noted as the highest risk.

  • Bank bail-ins do not apply to bank balances below the deposit Insurance threshold.

In the U.S., the FDIC covers 250 000 deposits. In the U.K., the FSCS covers 85 000 pounds, and in the E.U., it’s 100 000 Euros with various insurers involved. Insurance funds in the U.S. and Europe are woefully underfunded, particularly when we factor in derivative claims.

Insurers don’t have enough money to cover all Bank deposits. In the case of the FDIC, its 2021 annual report suggests that it only has around 120 billion dollars in its Insurance Fund, which is low compared to the 19 trillion dollars of Bank deposits in the U.S.

  • The third rule of bank bail-ins states that you will be given some alternative asset in exchange for your lost deposits. Alternative assets are typically shares in the bank that you bailed out.

Even though bail-ins may be a good solution for banks and financial institutions, they may be inconvenient to end users. For instance, you could temporarily lose access to your funds during a bank bail-in. Banks could put limits on their hours of operations, payments, transfers, and limits on cash withdrawals until the bail-in process is complete.

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The Bank of International Settlements, BIS, recently released a report titled “ Prudential Treatment of Crypto Asset Exposure.” According to this report, the BIS, which essentially is the Central Bank for all Central banks, released guidelines and operating procedures on how Central Banks can own crypto assets on their portfolios. This comes as a surprise considering the BIS and Central Banks around the world have been increasingly vocal in their opposition towards decentralized cryptocurrencies and stablecoins. This article summarizes this report and lists some of the key highlights the report.

Details of the Report

The guidelines listed in the report are to be implemented by the 1st of January 2025. The report contains standards that will be used by Central Banks across the world to purchase crypto assets and include them on their balance sheets. It was drafted in close consultation with central bank Governors across the world. The aim of this report is two-fold: Firstly, to provide guidelines through which Central banks across the world can hold crypto assets. Secondly, the report aims to preserve financial stability across the globe.

Crypto Asset categories

According to the standard issued, crypto assets will be grouped into two categories: Group 1 and Group 2. Group 1 (a) crypto assets will include tokenized security assets such as stocks and bonds.Group 1 (b) will include centralized stablecoins. Group 2 (a) crypto assets include all decentralized cryptocurrencies as such ETH and BTC. For crypto to be considered as Group 2 (a) crypto, then it has to have a market cap of over $10 billion and a daily trading volume of over $ 50 MILLION. Group2 (b) crypto lumps together all other alt-coins

Before a central bank opts to purchase any crypto assets, there are additional requirements that should be met. Additionally, a rigorous risk test will be carried out to know whether to place a crypto asset in Group 1 or Group 2. Also, if an asset is placed as a group 2 asset, then there is a maximum exposure limit- the maximum amount that can be invested. This exposure limit is currently set at not more than 2% of the bank’s total capital.

Role of BIS in Crypto regulation.

The roles that BIS will play in implementing these new guidelines will be as follows:

· Monitoring the implementation of the standards stated in the report

· Make additional changes and improvements to the report

· Monitor central banks across the world as they implement these new standards.

Central banks will also be required to report to the BIS the crypto assets they are holding and consult with the BIS before classifying a crypto asset as either Group 1 or Group 2. Though not explicitly stated, this essentially means that the BIS will have a sole mandate on giving the go-ahead on whether a central bank can make purchases and how to grade the various crypto assets.


Industry insiders agree that this move may prove to be bullish for crypto assets and especially BTC as central banks have the capacity to provide immense liquidity to the crypto market. However, we also run the risk of centralizing some of these crypto assets as central banks have ‘limitless’ capital to buy large amounts of any particular asset and wield control over it. A good example of how Central banks may wield control over crypto is through the use of synthetic stable coins- basically, stablecoins that have been issued using the native currency of a given country. It is interesting to note that this report mentions nothing about CBDCs. It is assumed that the BIS know that some central banks may lack the technical capacity to implement CBDCs within their jurisdictions. Synthetic stablecoins seem to be a viable option at this stage. Having a huge stake in these stablecoins essentially means that Central banks can have a say in their performance.

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Are banking APIs the real revolution?

Application programming interfaces (APIs) have been around for 20 years, but, as Ron Shevlin points out, just one in five community banks in the USA had deployed APIs before 2020, and they aren’t even on the radar of at least 20% of the banks.

Contrast this with Europe, where 97% of UK banks are already using them, and even the lowest uptake country, the Netherlands, has 83% of its banks deploying APIs. The reason for this huge gap between the USA and Europe is the latter’s Open Banking initiative, however Shevlin says that American banks cannot simply use this as an excuse for their low adoption of the technology.

As a result of the lack of API deployment, US banks are missing out on a number of opportunities, including the reduction of time and costs in several business processes, particularly product application-related processes.

The best known API providers include Stripe, Plaid and Yodlee. These three have furthered the connections between financial institutions and fintech companies. However, Shevlin says there are three fintech startups that are “poised to have a significant impact on the banking industry: Pinwheel, Sila, and Codat.”


Pinwheel, which has just announced a $7 million funding raise, offers an API for payroll data, “that handles everything from income and employee verification to easily switching and managing direct deposit.”

How would this revolutionise banking? According to a Techcrunch article, “For consumers, the main draw is automated direct deposit control, which will allow consumers to control where their paychecks go. For instance, if they want to split a direct deposit into multiple accounts, or regularly move part of their paycheck into a savings app like Digit or Acorns, Pinwheel can help them do that easily.”


According to Coindesk, Sila, “is an API platform that issues an ERC-20 stablecoin called SilaToken (SILA). Every transaction on the platform is done using the token, which is pegged 100:1 to the U.S. dollar. Sila plans to install card payments, international payments, business ID verification and begin issuing tokens within one business day. Its partner bank, Evolve Bank & Trust, plans to connect to the Clearing House system, a network started by big banks that provides access to instant payments.”

Techcrunch comments that Sila’s API would: “Supplant ACH as the payments choice for companies who need to move money. Sila’s API for identity verification, which empowers developers to identify users and use that info in the company’s banking API, allows users to debit their accounts and move funds from one account to another. On top of that infrastructure, Sila allows for the creation of smart contracts, which should allow for more rapid deployment of financial apps.”


Codat, which is based in London, has an API focused on small businesses, and is signing up 10,000 new customers per month. According to TechCrunch:

“Codat is building an API that connects with all the systems that hold all the relevant financial data. That type of information is usually spread across multiple systems, and small businesses often use different systems. On the other side, banks, insurance companies and more can speed up their internal processes and give you an educated answer for your next loan or insurance product.”

Codat is especially on point right now as small businesses are struggling and need funds. However, the current lending processes are time-consuming and confusing. Its API simplifies and streamlines the flow of data between small businesses and financial institutions, and could potentially disrupt the way SME loans are handled today.


On the other hand, perhaps APIs aren’t the ultimate answer for a banking revolution. Brian Platz, co-CEO of Fluree, says, “The answer isn’t to build a better API; rather, it is to turn the database inside out and let data escape from the walls that confine it. Blockchain is how data frees itself. It’s time to end the era of data APIs and begin to look into the blockchain.”