The crypto market rocked by the collapse of banks
America’s biggest bank bloat since the 2008 financial crisis is causing new headaches for crypto executives.
The three banks that suddenly collapsed in the past week served the digital asset industry, and their downfalls have raised concerns that crypto will be cut off from traditional finance in the US
Regulators including the Federal Reserve have been warning lenders for months about the risks of trading in digital assets. To crypto critics, these warnings sound prescient in the wake of the government’s seizure of Silvergate Capital, Silicon Valley Bank and Signature Bank. To crypto executives, they sound like trouble.
“If banks are told they can’t bank the sector, how does the sector create diversification and banking?” said Dante Disparte, chief strategy officer at stablecoin issuer Circle. “Unfortunately, the risk was too few banks banking too large a sector.”
The bank turmoil of the past week is the latest setback for a crypto industry that saw much of its value wiped out following the collapse of one of the largest crypto exchanges, FTX, and the indictment of its founder, Sam Bankman-Fried.
In recent years, Silvergate and Signature in particular have become an integral part of the digital asset ecosystem by offering both traditional banking services and fast payment networks. SVB had less exposure to the industry.
Now, with the banks closing, executives have been sent into a mad dash, looking for new banking partners — with some experts also speculating that regulators are trying to put them out of business.
“It’s hard to look at this and not see a coordinated effort to strangle the industry,” said Ryan Selkis, CEO of crypto research firm Messari.
Still, not everyone is convinced that the banking crisis is strongly linked to lenders’ ties to crypto. Ultimately, the cause was probably a combination of poor risk management and macroeconomic problems, said Mark Williams, a former Federal Reserve Bank examiner who teaches at Boston University. In particular, the Fed’s aggressive fight against inflation left some lenders strapped with dwindling deposits and deeply discounted bonds that they could only sell at a loss.
“When you lose depositors’ confidence,” Williams said, “even the strongest bank can’t stand up.”
A spokesperson for the New York Department of Financial Services, which shut down Signature on Sunday, said the decision “had nothing to do with crypto,” adding that the bank also dealt in everything from food vendors to commercial real estate.
“The bank failed to provide reliable and consistent data, creating a significant crisis of confidence in the bank’s management,” the spokesperson, who was granted anonymity to discuss a departmental decision, said in a statement. “The decision to take possession of the bank and turn it over to the FDIC was based on the current status of the bank and its ability to conduct business in a safe and sound manner on Monday.”
The New York regulator’s remark came after former Representative Barney Frank, a Signature board member, told POLITICO on Monday that the bank run was caused by “the nervousness and beyond the nervousness of [Silicon Valley Bank] and crypto.”
“I believe that if it hadn’t been for FTX and the extreme nervousness around crypto, that this wouldn’t have happened – even to [Silicon Valley Bank] or to us, said the Massachusetts Democrat who was a key architect of new rules enacted in the wake of the 2008 crisis. “And it was not something that could have been foreseen by regulators.”
Still, regulators are watching for any fallout from the banking industry’s problems with crypto.
The chairman of the Commodity Futures Trading Commission, Rostin Behnam, said on Wednesday that he is “comfortable that we will get through this without disruption to our markets” after the banking regulator’s response at the weekend.
But the CFTC is watching to ensure that the crypto-linked derivatives markets it oversees “remain resilient [and] free of fraud.” Given the close ties Silvergate and Signature had to the industry, Behnam told reporters at an industry conference in Florida that there is a chance the crypto market could see problems with liquidity and access to traditional finance.
So far, the immediate impact has been relatively muted among some of crypto’s biggest players.
Coinbase, the nation’s top crypto exchange by market volume, has $240 million in corporate funds committed to Signature, according to the company. But no customer funds have been affected, Coinbase said in a tweet.
Kraken ends its relationship with Silvergate. Both companies have said they use a number of different banks for customer funds.
However, Circle’s dollar-pegged token USDC was rocked by traders over the weekend.
The so-called de-pegging came after the company disclosed that it had more than $3 billion deposited with Silicon Valley Bank. Although it represented just a fraction of Circle’s reserves — the bulk of which is held in a BlackRock-managed money market fund — news of the exposure sent the token’s price plunging below the $1 peg. The token has since returned to the relief of crypto leaders and supporters.
USDC’s “breaking the buck” injected uncertainty into crypto markets that see the token as a stable resource and a critical element of the ecosystem’s payment infrastructure.
The volatility had more to do with Silicon Valley Bank than Circle, Disparte said. The bank’s investment portfolio was torpedoed when the Fed started raising interest rates to bring down inflation. Circle’s exposure to the institution posed a major threat to the token.
Disparte said he hopes pro-crypto lawmakers can use the disaster surrounding the collapse of the three banks to pass the stablecoin legislation, which has been in the works at House Financial Services for nearly a year.
Sam Sutton, Zachary Warmbrodt and Victoria Guida contributed to this report.