By Geoffrey Smith
Investing.com — Cryptocurrencies soared on Monday after federal action to bail out one of the largest regulated banks providing services to the industry eliminated a major immediate threat to the industry.
The US Treasury, Federal Reserve and Federal Deposit Insurance Corporation said on Sunday they would support deposits from Silicon Valley Bank (NASDAQ:) and the Signature Bank (NASDAQ:), two institutions that provide essential banking services to some of the biggest players in the cryptocurrency industry.
The announcement eliminated the risk that billions of dollars held by companies such as Coinbase (NASDAQ:) and Circle, the issuer of the , could be lost as part of the bank bailouts put in place by the authorities.
The cryptocurrency universe is ill-positioned to absorb further such shocks, still reeling from the FTX implosion late last year. Fraud allegations at FTX have led to increased scrutiny of the crypto space, particularly regarding its interactions with the regulated banking industry and the risk that poor governance in cryptocurrency could infect financial institutions with the main street.
The stablecoin USD Coin, issued by Circle, was one of the biggest gainers of the day on Monday. Circle has deposited $3.3 billion of its reserves with Silicon Valley Bank, a sum that far exceeds the maximum guaranteed by the federal government. The risk of taking a “haircut” to its deposits as part of the SVB resolution sent USD Coin crashing as low as 88c on Saturday, but the coin, which is designed to trade at exactly $1, has rallied at 98.61c at 04:45 ET (09:45 GMT). Another big beneficiary has been the stablecoin, which holds most of its reserves in USD Coin. It rose to 98.41.
More mainstream digital assets benefited not only from the implications of federal action for the safety of reserve assets, but also from the impact of weekend events on the interest rate outlook.
Several banks, including Goldman Sachs, now assume that the Fed will proceed more gently with any further monetary policy tightening, lest it further damage the banking system.
Short-term U.S. interest rate futures rose sharply Monday morning in Europe as investors cut bets on a rate hike. At 4:45 a.m. ET, the market indicated that the most likely outcome of next week’s Fed meeting is now no change in . Previously, the consensus was for a 25 basis point hike, with a sizable minority betting on a half point hike after a string of stronger than expected economic data since the start of the year.
$ was up 8.1% at $22,039, while was up 8.0% at $1,575.