Market Overview by Nauman Sheikh, Head of Treasury Management
What a whirlwind of a weekend. Bank regulators (FDIC, OCC, Fed) took decisive action to get ahead of an accelerating risk of contagion. Silvergate Bank was shut down quietly without government intervention, apparently with adequate equity to make good on deposits. Silicon Valley Bank (“SVB”) and Signature Bank (“Signature”) have been shut down with the Treasury announcing that, regarding SVB and Signature, 100% of depositors are to be made whole (insured and uninsured) at no cost to taxpayers, and certain debt holdersholders, equity holders and management will be wiped out. Additionally, the Fed is offering a 1 year credit line against eligible collateral (at par value) as a liquidity backstop at SVB and Signature. Furthermore, USDC (and most other stablecoins except USDT) broke peg hitting a low of 88c from concerns over the fate of deposits held with Silvergate and the redemption window being shut off over the weekend. The peg has quickly returned back to parity as redemptions there are proceeding normally.
A precedent has now been set for the rest of the regional bank sector. Depositors will be bailed out, but investors across the capital structure will not. Regional bank C-suites are now put on notice as the balance sheets will be heavily scrutinized by investors. Regional bank stocks like Western Alliance, First Republic, and indeed the KRE ETF (representing the sector as a whole), continue to fall precipitously this morning with trading halts being placed on a number of names.
There has been another casualty in all of this. The crypto sector in the US has to a large degree been debanked with 2 of the largest crypto on- and off-ramps in Silvergate Bank and Signature, gone and leaving the industry scrambling to find new bank partners. There is a substantial gap in the market for a few big players to emerge longer term, but in the short term the industry remains fragmented with smaller players.
Meanwhile, treasury bond prices have rallied in a classic flight to safety with yields dropping down to their 200-day moving average. The events happening in the banking sector in and of itself implies further tightening of liquidity conditions. What is Chair of the Fed Jerome Powell's next move on March 22? Goldman, NatWest and now Pimco all predict a halt to further rate hikes. Terminal interest rates are now down to 5.25% in July from 5.75% with rate cuts priced in shortly after. It appears clear that the market sees us inevitably heading towards a recession. Further, we have the US CPI release tomorrow which Inflation Nowcast is predicting slightly worse than consensus numbers. This blurs the situation even further.
Meanwhile perversely, crypto is seeing flight to safety flows helped along by a dramatic drop in yields. In fact, a rally in the space gained momentum once USDC redemptions were confirmed this morning and funding rates flipped positive from negative over the weekend. We have not seen a corresponding increase in Open Interest yet so the sustainability of this rally is still in question. Additionally, this rally has been led by Bitcoin with the ETH/BTC ratio still flatlining below resistance levels of 0.072. This level needs to be convincingly breached to signal a sustainable and broader based rally.
NFT Market News by Matthew Linares, Senior Analyst
Amazon Wants to Sell NFTs
Amazon has announced its intention to link real-world assets purchased on the platform to tokens and NFTs, potentially becoming the world's largest NFT seller. Amazon's success can be attributed to its ownership of the ecosystem and potential customer base, which gives it a significant advantage in the potential NFT market. This means, for Amazon, there are fewer moving parts and customer journey friction points when buying an NFT than with its competitors. With its extensive customer base, the NFT market could become more mainstream, and Amazon could become the go-to platform for buying and selling.
To enter the NFT market, Amazon has hired Web3 talent and plans for a private blockchain. The company's hiring of Web3 talent shows its seriousness in entering the NFT market. Amazon could disrupt the market and attract more buyers and investors with its vast resources and expertise. Additionally, Amazon announced that every US Prime customer would be notified of the digital collectibles once it goes live, which is significant because it has over 150 million Prime subscribers in the US alone. This move could lead to more people buying and selling NFTs on Amazon bringing the market more mainstream.
While Amazon's move into the NFT market has significant potential, it is not without its challenges. The volatility of the market is one of the biggest challenges. Prices can fluctuate wildly, and an NFT is not guaranteed to maintain its value. Amazon will need to develop strategies to manage this volatility and protect its customers from losses. Another challenge is the competition from established marketplaces like OpenSea, Blur.io and Nifty Gateway. To differentiate itself, Amazon will need to offer unique features and services. Additionally, the plan for real-world assets and NFTs could raise regulatory concerns, and Amazon will need to navigate the regulatory landscape carefully and ensure compliance with all applicable laws and regulations. As such, Amazon’s potential success may hinge on its ability to navigate the challenges.
Latest News by Sam Eisner, Associate
WELCOME FRIENDS: Hundreds of institutions and prominent individuals have invested directly in crypto, adopted the value thesis, or started building technology to support digital assets since Wave started tracking this metric in late 2020. Now the rise of the Metaverse, Decentralized Finance (DeFi), Non-Fungible Tokens (NFTs), and Decentralized Autonomous Organizations (DAOs) is driving mainstream adoption of blockchain technologies everywhere we look. We’re continuing to keep track of it every week here:
Crypto tax software provider CoinTracker is integrating its software with H&R Block, a company that helps millions of customers prepare their income taxes.
A project run by interbank messaging company SWIFT to connect central bank digital currencies, or CBDCs, offers “clear potential and value,” the company said in a statement on Thursday. The project, which included banks such as France's BNP Paribas, Italy's Intesa Sanpaolo and the U.K.'s Standard Chartered (STAN), as well as the central banks in France and Singapore, will now move on to a second phase of testing to assess applications like trade finance and securities settlement.
REGULATORY ROUNDUP: We're living through the era of regulatory recognition of digital assets. The legislation, litigation, and regulation happening today will dictate the entire future of our industry, and we have a historic chance to shape those changes by staying informed and exerting political influence.
U.S. President Joe Biden said he would call on Congress and bank regulators to strengthen rules for financial institutions in the wake of the Silicon Valley Bank (SVB) and Signature Bank collapses over the past week.
SEC Chair, Gary Gensler, posted an OpEd in the Hill last week stressing the importance of compliance within the crypto markets.
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