Following an unprecedented 2022, 2023 was supposed to put the financial sector back on track. Indeed, 2023 was looking particularly promising, at least until a little over a week ago. NASDAQ indices were trending positively. And while the crypto market cap has not yet recovered from the collapse of 2022, it has been well above the $1B valuation for a while.
However, within slightly under a week, three of the most crypto-friendly banks in the US have shuttered at the hands of the US regulators.
Silvergate was the first to go down by announcing that it was shuttering operations on March 8. Silicon Valley Bank, the popular tech and VC bank, was next to fall, shutting down on March 10. Then Signature Bank, a prominent bank with a strong crypto-focus, was unexpectedly seized by the New York District of Financial Services (NYDFS) on March 12.
The ripple effects of these events have yet to be understood, but already Credit Suisse and a variety of US banks, including First Republic Bank, were either taken over or propped up by central banks, the FDIC, and large national banks. Since then, talks of expanding the federal programs that provide liquidity to banks have relieved some of the pressure.
The banking industry is not out of the woods yet. Nearly 190 U.S. banks are in danger of uninsured market runs (similar to that of SVB), according to a recent report. While Treasury secretary Janet Yellen and Federal Reserve Chair Jerome Powell take turns reassuring depositors that the banking system is strong and resilient, the market may still be on the brink of the largest and most brutal banking crisis ever.
In January, a joint statement by the FDIC (Federal Deposit Insurance Corporation), OCC (Office of the Comptroller of the Currency), and the Federal Reserve “strongly discouraged” banks from supporting crypto. This seems to be an ongoing theme as Signature Bank director Barney Frank suggested the bank had been closed due to regulators wanting to send an “anti-crypto message”. The NYDFS has since pushed back on Frank’s statement.
Others in the administration seem to believe that the writing was on the wall. For example, Senator Warren strongly suggested so following the crisis at Silvergate Bank:
However, the Blockchain Association, and a few others, have another view on the situation. On March 16, the Blockchain Association submitted Freedom of Information Act requests to the FDIC, the board of governors of the Federal Reserve System, and the OCC for documents and communications that could potentially show that regulators’ actions “improperly contributed” to the collapse of the three banks.
Regardless of who, or what is to blame, there are several winners and losers so far. Here is a short list of some of them:
While the sides take turns blaming the other, the clear losers in the battle are US consumers. If trust and public confidence in crypto-native CEXs and trading platforms hit bottom with the collapse of FTX, now consumers have reason to question the resilience of the traditional banking system.
Regulators would be wise to heed to words of William Shakespeare: “Let not the world see fear and sad distrust govern the motion of a kingly eye”. In other words, don’t let fear decide your future.