Among them is Circle, the issuer of the second most popular US dollar stablecoin, USDC. Circle used SVB to custody part of its US dollar underlyings backing USDC.
How did that happen?
Much has been written about what caused the events surrounding the bank run on SVB. A brief overview is that rumors spread about the significant losses that SVB had accumulated. These rumors triggered a bank run that emptied the bank, paralyzing its business and requiring the intervention of the Federal Reserve.
Securities can be safer than cash deposits
The million-dollar question that many in the crypto industry are asking themselves today is how can we protect our assets in case our banks fail.
Holding cash in a bank may seem like a very safe and secure option for protecting your assets, but there are situations where this may not be the safest choice. In particular, when you hold cash in a bank account, you are exposed to counterparty risk, which is the risk that the bank may fail or become insolvent. This is what happened with SVB.
It may not be apparent to many investors that when you own a bank deposit, you are essentially lending money to a regulated institution; that then re-lends that money to its customers. As a result, the account balance you see in your banking app doesn’t represent real cash; instead, it represents how much money the bank owes you.
Usually bank deposits are cash-like products that are used exactly like cash. But if the bank goes bust, a bank deposit is considered a debt to which you and all other creditors are legally entitled, but only if the bank can repay it after going through the liquidation process.
So, instead of depositing cash with your bank, you could custody book-entry assets (like bonds and stocks). Here the bank is not the asset owner but acts as a custodian. Thus, in the case of a bank collapse, the assets are not part of the liquidation process because they are not held on the bank’s balance sheet.
How can Backed help?
At Backed, we help our on-chain customers gain exposure to stocks and bonds. We issue tokens that represent the ownership of structured product units. Each token is a unit of a structured product tracker certificate, which tracks the listed value of the underlying, and is fully backed 1:1 by that underlying. All our underlying assets are held in a secure custody account, separate from the bank's balance sheet and bankruptcy remote, thus removing third-party exposure.
We offer equity and fixed-income products, which can help investors navigate banking turmoil and manage wealth.
For more information on our products and to view our legal documentation, please visit https://backedassets.fi/legal-documentation, or get in touch with us at [email protected].
Backed is a Swiss start-up bridging real-world assets on-chain. Backed issues on-chain tokens that track the value of real-world assets, such as stocks or ETFs. Tokens are freely transferable across wallets, are fully collateralized by the underlying asset, and are issued in compliance with the Swiss DLT act.
Learn more about Backed at backed.fi and by following us on LinkedIn and Twitter.
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