Cathie Wood: regulators missed ‘crisis looming in plain sight’

Cathie Wood, the head of ARK Investment Management, thinks regulators missed problems in banks like Silicon Valley Bank because they were too focused on cryptocurrencies.

U.S. regulators have paid close attention to the cryptocurrency sector in recent months, warning banks away from providing services to the industry and arguing that many cryptocurrency services needed to comply with U.S. securities regulation. 

Yet on Tuesday, Wood claimed on Twitter that the cryptocurrency sector held up amid the crisis. “While the U.S. banking system was seizing up in response to bank runs threatening regional banks, Bitcoin, Ethereum and other crypto networks didn’t skip a beat,” Wood tweeted.

“Regulators should have been focused on the centralized and opaque points of failure looming in the traditional banking system” rather than on decentralized finance and cryptocurrencies, Wood argued. “They should have all over the crisis that was looming in plain sight: asset and liability duration mismatches,” she continued

U.S. regulators took over Silicon Valley Bank on Friday, following the largest collapse of a U.S. bank since 2008. SVB was the subject of a bank run after it admitted it sold assets at a loss to cover an increase in customer withdrawals, spooking its customers.

On Sunday, the Federal Reserve said it would cover SVB’s deposits in full, even beyond the caps of U.S. deposit insurance. The central bank also launched a new lending program that would help banks avoid the need to sell securities at a loss to raise liquidity. Regional banking stocks recovered on Tuesday following dramatic losses that forced some trading halts on Monday.

Wood alleged that traditional banking hurt cryptocurrencies, rather than the other way around, arguing that the recent crisis showed that “instability in the banking system threatened stablecoins, the on-ramps to DeFi, in stark contrast to regulator rhetoric.” Stablecoins are cryptocurrencies pegged to a specific currency, usually the U.S. dollar.

On Friday, Circle, the backer of USDC, a major stablecoin tied to the U.S. dollar, said that $3.3 billion of its reserves were tied up in Silicon Valley Bank. The stablecoin briefly lost its peg against the dollar, dropping at times to around 90 cents. 

USDC has since recovered parity with the dollar. Circle announced on Sunday evening, after the Federal Reserve announced that it would protect SVB’s depositors in full, that it expected to have access to its accounts by Monday, and that it would partner with a new bank—the New Jersey-based Cross River Bank—for its commercial banking services.

Bank failures

Two banks providing services to the cryptocurrency industry failed in the past week. Last Wednesday, Silvergate Bank, based in California, announced it would voluntarily wind down operations, after deposits at the bank plunged following the collapse of cryptocurrency exchange FTX in November. 

Then, on Sunday, the U.S. Federal Deposit Insurance Corporation announced it was taking over Signature Bank of New York. The Federal Reserve announced that Signature Bank’s depositors would be protected in full, much like those Silicon Valley Bank. 

The failure of both banks could leave cryptocurrency companies without some of the round-the-clock payment networks used to convert digital currencies into fiat money. As crypto companies turn to more traditional banks, the lack of 24-hour services might increase volatility outside of regular business hours, such as over weekends.

The failures of Silvergate and Signature Bank of New York are the latest in a string of high-profile failures in the cryptocurrency space, such as the collapse of the algorithmic stablecoin TerraUSD last May, the bankruptcy of crypto lender Celsius last July, and FTX’s implosion last November. 

The value of major crypto currencies have increased from lows before the weekend. As of 3:00 p.m. Hong Kong time, Bitcoin is up 27% and Ether is up 24% from lows on Friday. Crypto investors could be betting that the banking crisis ends future interest rakes from the U.S. Federal Reserve, after a tighter monetary policy helped batter cryptocurrency values last year. 

An end to increased interest rates might also be good news for Wood, whose fund on Friday saw its largest influx of funds since April 2021, according to Bloomberg. Ark’s investments in tech companies are sensitive to increases in interest rates.

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