The Banking Crisis Is Not Crypto’s Fault

Crypto might have a banking problem, but banks don’t have a crypto problem.

AccessTimeIconMar 13, 2023 at 5:34 p.m. UTC
Updated Sep 28, 2023 at 2:10 p.m. UTC
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Silvergate Bank voluntarily wound down on March 8 ($12 billion in assets), Silicon Valley Bank (SVB) went into FDIC receivership on March 10 ($200 billion in assets), Signature Bank was shut down by state regulators on March 12 ($100 billion in assets).

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All these banks serviced some crypto clients. Some serviced more than others. Silvergate, in particular, banked several crypto exchanges and operated a 24/7 instant settlement network among Silvergate clients. The collapse of FTX weighed on Silvergate, and a scathing letter sent by U.S. Senator Elizabeth Warren (D-Mass.) to the bank’s executives late last year partially weakened public perception of the bank. The Biden administration also voiced concerns.

So Silvergate was run into the ground by a classic bank run that was at least partially encouraged by the U.S. government and not because of crypto (even if Senator Warren maintains it was). Especially when you consider that, in the end, Silvergate’s liquidation was voluntary and its plan includes a “full repayment of all deposits.”

Shortly after Silvergate, SVB was taken over by the Federal Deposit Insurance Corporation (FDIC) following an old-fashioned bank run. The bank run was spurred on both by SVB mismanaging risk, losing money by putting customer deposits in the wrong financial securities (like long-dated Treasurys or the wrong flavor of mortgage backed securities) and by fear stoked by the venture capitalists who own massive financial interests in many of the companies banked by SVB.

Adding more kindling to the SVB fire – Reuters reported over the weekend that credit rating agency Moody’s was preparing to downgrade SVB’s credit rating, which potentially drove SVB to manage risk like this. On the downgrade news, SVB reportedly looked to Goldman Sachs for advice.

SVB subsequently sold $20 billion of bonds over a weekend, which generated a loss, and then aimed to fill that hole by raising equity capital. That equity raise failed and now SVB no longer exists. (This is starting to smell like 2007, isn’t it?)

Do note, though, that SVB is more dependent on Silicon Valley startups than it is on crypto companies.

Now, on Sunday, we had Signature shut down by state regulators. Signature is viewed as another crypto-friendly bank as Silvergate was. We’ve seen Barney Frank – yes, the Frank in Dodd-Frank – come out and say that clients may have overestimated Signature’s exposure to crypto. Frank knows this because, and I cannot believe this is true, he is a board member at Signature.

Frank also adds that Signature could have remained a going concern. Obviously regulators disagreed after customers withdrew more than $10 billion of deposits on Friday and Signature was taken over by the FDIC on Sunday.

Crypto outcry

Setting aside Silvergate for a moment because, let’s face it, it’s far less of a systemic risk to the broader banking system than SVB and Signature are (it is much smaller and it didn’t get a government backstop), there is a very interesting thing that ties SVB and Signature together: Media outlets and general outcry blames crypto for these bank failures.

That is simply not true.

Even Barney Frank suggested that it wasn’t necessarily a crypto problem but a messaging about a crypto problem. He told CNBC: “I think part of what happened was that regulators wanted to send a very strong anti-crypto message...We became the poster boy because there was no insolvency based on the fundamentals."

Each of these failures is the result of poor risk management of customer deposits and a subsequent bank run. Taking one step back, suggesting that a single asset class, whose companies have issues getting banking services in the first place, would be able to take down the banking system on its own is patently absurd. What is this? Real estate?

Crypto has a banking problem, but banking doesn’t have a crypto problem.


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George Kaloudis

George Kaloudis was a research analyst and columnist for CoinDesk.

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