Crypto enterprises are being hammered particularly hard by a crisis of confidence affecting U.S. banks. It has since spread far beyond last week’s failure of the cryptocurrency-focused financier Silvergate Capital (ticker: SI). The greatest banking collapse since the 2008–2009 financial crisis occurred when the federal government intervened on Friday to close Silicon Valley Bank and Sunday to close Signature Bank (SBNY).
“The spectacular fallout of Silicon Valley Bank, the voluntary liquidation of Silvergate, and the abrupt shut down of Signature Bank has seriously impacted not only the ecosystem of digital assets but also the ecosystem of Silicon Valley,” wrote Owen Lau, an analyst at Oppenheimer, in a note published on Sunday.
Fortunately, depositors at Silicon Valley Bank and Signature Bank will receive their money returned, and the Federal Reserve announced that additional emergency cash would be made accessible to other qualified banks as a backup.
What led to the collapse of Signature Banks
The collapse of Signature Bank, a New York-based financial institution with strong ties to the cryptocurrency sector, over the weekend due to a depositor run further rolled the market for digital assets, which has recently had a spate of devastating setbacks.
The bank has long been a crucial financial player in the sector, providing resources for facilitating electronic transactions and serving as a client to well-known bitcoin businesses like the cryptocurrency exchange Coinbase. Last Wednesday, the closure of another cryptocurrency-friendly bank, Silvergate Capital, upended the small community of conventional banks that serve the needs of cryptocurrency companies and their customers.
According to New York Governor Kathy Hochul (D), in a news conference on Monday, the demise of Silicon Valley Bank, another financial institution knit into the fabric of the technology industry, contributed to the failure of Signature Bank.
Does This Suggest An Alleged Crypto Attack?
The circumstances surrounding the closure of Signature are extremely unclear. According to Dave Weisberger, CEO and co-founder of CoinRoutes, it appears that authorities used the larger banking system crisis as a justification for shutting down one of the few remaining crypto-focused banks in the United States.
Weisberger stated, “Many in the digital asset market are concerned that this was done purposely to discourage individuals from investing in cryptocurrency because it was done so abruptly and with relatively little explanation as to why.”
What was the bankruptcy of the bank led to?
As roughly 20% of deposits at Signature Bank came from crypto firms, the safety of such accounts also protects the digital asset sector from losses.
The Signet interbank transfer system, a component of the crypto market infrastructure that was one of the few options left when Silvergate stopped offering its SEN service, will no longer exist due to Signature’s bankruptcy, which is more concerning. The absence of these networks, which crypto market players utilized to move funds for trading, has already damaged liquidity for Bitcoin and is likely to make digital assets more volatile.
Coinbase, which has a revenue-sharing agreement in which Circle pays Coinbase to retain clients’ dollar balances and its corporate funds in USDC, is further troubled by the shakiness of USDC and the decline in its market cap. This industry is becoming more appealing in an environment where interest rates are rising. Analysts have also called for Coinbase to diversify its sources of income, as the company is currently largely dependent on revenue from cryptocurrency trading.
This is what Oppenheimer’s Lau means when he warns about revenue risks at Coinbase. But he isn’t the only person from Wall Street. A request for comment from Coinbase was not immediately answered.
Conclusion
These failings left a critical hole that might make it more challenging to access crypto, according to Kozyakov. “With SVB holding over $5 billion for significant crypto VCs, its failure might also impact startup investments.”
This has revived some debate about whether crypto banking should be integrated into the current financial system or segregated from normal banking.
Nancy J. Allen is a crypto enthusiast and believes that cryptocurrencies inspire people to be their own banks and step aside from traditional monetary exchange systems. She is also intrigued by blockchain technology and its functioning.
Source: https://www.thecoinrepublic.com/2023/03/16/why-signature-bank-collapsed-and-how-does-it-affect-crypto/