• Wed. Feb 21st, 2024

Crypto Industry Problems Intensify As More Banks Shut Down

Crypto Industry Problems Intensify As More Banks Shut Down

 

The financial turmoil that destroyed Silvergate Bank, Signature Bank, and Silicon Valley Bank will undoubtedly cast a dark shadow on crypto’s development.


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Three major banks with extensive ties to crypto collapsed over the weekend. However, Circle’s previously depegged USDC stablecoin appears to have survived an existential crisis of its own.

The second-biggest stablecoin lost its peg on March 11 plunging to $0.8774 in the wake of reports that it had $3.3 billion engulfed in the collapse of Silicon Valley Bank a day earlier. By March 13, the coin had managed to regain its full dollar peg, reducing the ongoing uncertainty in the markets.

Several things happened, most significantly the Federal Reserve, U.S. Treasury Department, and Federal Deposit Insurance Corporation (FDIC) confirmed they would use emergency powers to guarantee that all the depositors were made whole, instead of just being protected up to the FDIC’s standard $250,000. The USDC price surged in real-time.

Related: Christopher Smalley for Customers Bank Explains Institutional Cryptocurrency Adoption


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But, the positive news was choked by soundbites by the authorities about not ‘bailing out’ banks.

What Silicon Valley Bank (SVB) had to a huge extent was bad timing. On March 8, Silvergate said that it was shutting down its operations after a SEC filing a few days previously warning that it might not have the capacity to continue as a growing fear became a self-fulfilling prophecy.

SVB Financial Group, on March 10 became the biggest bank to fail since the 2008 financial crisis, in a collapse that hit the global markets hard.

The Silicon Valley Bank Collapse

SVB was not robbed like the FTX exchange or seen its assets devalue steeply to nothing like TerraUSD stablecoin, which collapsed with LUNA in a $60 billion failure in May 2022. However, both cases, and the multiple crypto lender bankruptcies filed between them, were still fresh in everyone’s minds.

Related: BUCKLE UP!- Why Did Terra LUNA And UST Crash So Steeply?

Although Silicon Valley Bank has just several crypto clients, Silvergate’s failure was fresher, and the bigger bank was caught in a panic mode by investors. What it did was sell shares and securities to shield its Finance after a plunge in the startup sector – its main clients – and that caused massive outflows.

Silicon Valley Bank’s clients, who were mainly startups and other tech-centric firms, began becoming needier for cash in 2022. This made them withdraw money from their accounts.

In the meantime, SVB needed to keep selling its assets, mostly bonds, at a loss to free up capital so that clients could withdraw funds. However, the bank got to a point where these losses were considerably high, users started to fear SVB could not guarantee access to all customers’ funds. In turn, it fueled a huge bank run that pushed the FDIC to step in.

Silicon Valley Bank

But then big venture investors warned portfolio firms to pull their money out, a wild run started, and SVB did not have enough liquidity to meet all withdrawal demands.

Over the weekend, Treasury Department, FDIC, and the Federal Reserve said that Signature Bank and SVB’s failures posed a huge enough risk to the whole banking network that it merited letting investors take the strange step of guaranteeing the bigger deposits.

Shockwaves from the collapse of these banks pounded global bank stocks on March 14, 2023, as assurances from President Joe Biden and various policymakers failed to calm market worries about the contagion and prompted a reconsideration of the interest rate outlook.

Biden insisted that his administration’s actions meant that Americans may have confidence in their banking infrastructure and promised stiff regulation.

Why Did Signature Bank Fail?

Signature Bank, a New York-based financial institution that turned into a major lender in the crypto space, was ordered to close down. This bank was part of just a few financial institutions letting clients deposit crypto assets. The bank was struggling after the crypto markets plunged due to the abrupt FTX collapse in November 2022.

Regulators close Signature Bank

Signature board member Barney Frank, a former congressman who assisted in the design of new financial regulation after the 2008 financial crisis, blamed Silicon Valley Bank for its collapse. He told The Wall Street Journal:

“It was an SVB-generated panic. We were fine until the last couple of hours on Friday.”

Silvergate Shutdown

Silvergate was a crypto-friendly financial institution popular among investors. It was an incredible cog in the industry’s infrastructure, operating mostly as a fiat on-ramp for many businesses in the space.

On March 8, Silver Capital said it would shut down its operations and proceed to liquidate Silvergate Bank. The firm’s stock plummeted sharply after that announcement. Silvergate was one of the two major crypto-banking giants with the other being Signature Bank which has also shut down.

Silvergate stated:

“In light of recent industry and regulatory developments, Silvergate believes that an orderly wind-down of Bank operations and a voluntary liquidation of the Bank is the best path forward.”

All the deposits will be fully repaid, according to a liquidation plan shared by the bank. The crypto-friendly bank is yet to say how it wishes to resolve all claims against its business.

Related: New Crypto-Friendly Banks Provide Overnight Funds

On March 3, Silvergate suspended its Silvergate Exchange Network (SEN) payments platform, one of its major offerings. As part of the liquidation, Silvergate said that it would permanently close down the payments network. But, it insisted that all deposit-related services are still operational until the company finalizes its wind-down process.

Crypto's go-to Silvergate bank collapsed.

How The Bank Collapses Impact The Crypto Sector

Apart from the investors’ fear-based reactions to the news of bank collapses, experts and analysts do not see any long-term impact on the crypto sector. Currently, the crypto market appears to have recovered from the thorough beating from the weekend and stablecoins are now re-stabilizing.

Crypto markets reacted with the massive growth of Bitcoin (BTC) and Ethereum (ETH) capitalization after the news about the Signature bank, which might be a sign of growing confidence in independent decentralized assets.

The most significant impact will happen in the form of a widespread market examination. Ilya Volkov, CEO of and Co-Founder of YouHodler, a Swiss-based international fintech firm offering various Web3 crypto and fiat service, commented:

“Examining risk management strategies, banking regulation, and cooperating with crypto companies. Also, large companies like Coinbase and Paxos will be in search of a new bank. For now, it’s not clear what new financial institutions will partner with these crypto companies in the wake of Silvergate, SVB, and now Signature.”

The sector is now running out of options and this scenario needs to be resolved soon to prevent more problems. The whole market needs to go through some turbulent and challenging times to mature. In any case, turbulence is great for traders.

It appears like the American banking system is unintentionally divided into two tiers:

  • The ‘big four’ banks are already systemically important and too large to implode.
  • All the other banks that invest depositors’ funds, and are not protected.

This is not a problem for the crypto industry. Moments like this help in exposing the weaknesses of traditional banking and increase attention to the positive benefits of blockchain technology. The solution for all this contagion lies in between the two extremes, according to Volkov.

One extreme is the current banking infrastructure, and the other is anonymous decentralized finance (DeFi) protocols. A healthy integration between the two spaces of regulation and decentralization is what’s best for the markets.

For now, the crypto sector has no FDIC-like protocol to prevent a liquidity crisis. But, various operators are working towards achieving that. In the meantime, the traditional banking sector is extensively centralized and has no self-custody options. The sooner the crypto sector balances out between these two worlds, the better it will become for everybody.

There is always a silver lining in extreme events. Such events produce volatility and there is a chance for traders to make profits in volatile markets.


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Kevin Moore - E-Crypto News Editor

Kevin Moore - E-Crypto News Editor

Kevin Moore is the main author and editor for E-Crypto News.