- Two payment networks crucial to the US stablecoin ecosystem have just shut down
- Silvergate was forced to shut down the Silvergate Exchange Network (SEN) on March 3, while regulators took over Signature Bank and shut down their Signet payment network on March 10
- As a result, it is no longer possible to ensure parity between stablecoins backed by the dollar and the US dollar outside bank opening hours, which threatens the sector with instability.
The US dollar-backed stablecoin industry is entering a turbulent period with the shutdown of the SEN and Signet payment networks. These two key financial services solved a major problem: you can trade cryptocurrencies 24/7, every day of the year – banks have opening hours and do not operate on weekends.
SEN and Signet thus formed the missing link between the traditional banking sector and the crypto sector. The USDC stablecoin published by Circle used these payment networks. But now they have to fall back on much more restrictive solutions. On the one hand, the Federal Reserve’s Fedwire service allows transfers 22 hours a day on weekdays: the service stops at 7:00 p.m. and resumes at 9:00 p.m., and is closed on weekends and during federal holidays.
Stablecoins enter a turbulent zone
And it comes with conditions that not all crypto players necessarily meet. The alternative are ACH (Automated Clearing House) transfers which also come with problematic restrictions for trading stablecoins – they also don’t work on weekends.
Many industry players believe that the closure of SEN and Signet will therefore create immediate liquidity problems for the stablecoin ecosystem which will no longer be able to be exchanged for dollars 24/7. Nic Carter, an expert from Castle Island Ventures explains: “we can now expect decoupling (of value) less smoothing and more volatility when trading on weekends”. This makes stablecoins less stable and predictable – and therefore potentially less interesting.
This is what happened to USDC last weekend: as investors rushed to sell their stablecoins, the value of USDC fell below $0.90, forcing Circle to suspend trading between Saturday evening and Monday. For the time being, the various players are left with no other solution than to adapt to this new normal. In particular by stopping exchanges beyond bank opening hours.
Other players, located abroad, are however well placed to take over in the medium term. This is the case of the British BCB Group (in which Circle has invested) – which is in the process of completely reviewing its strategy. BCB wanted to launch a dollar-backed payment system in partnership with Signature. But the takeover of Signature by regulators and the shutdown of the Signet payment network postponed the project for at least several months.
BCB Group is now seen as one of the players that can take over from SEN and Signet. It remains to be seen in the coming months whether or not the industry will be able to overcome the problems of liquidity and dependence on traditional financial infrastructures. Stablecoins have the advantage of overcoming the constraints of the traditional banking sector. However, the sector has yet to demonstrate its ability to create more resilient and sustainable alternative financial infrastructures.
