Note: The US bank failure crisis will be detrimental to digital currencies

Most people think that bank failures are the result of a complex series of events. However, the collapse of Silicon Valley Bank and Silvergate can be traced to two major factors: limited diversification among depositors and overinvestment in long-dated assets such as US government bonds.

Bank collapses and digital currency business bankruptcies in the United States

To Report Finance Magnets, rising interest rates caused the value of bonds in which the Silicon Valley bank had invested to fall. At the same time, as capital inflows into the tech sector dwindled following the Covid-19 pandemic, Silicon Valley Bank clients began withdrawing cash to finance themselves.

The sale of the bonds at a price far below what was paid for them alarmed many depositors, and when withdrawals accelerated, they realized that the bank’s collapse was imminent. Just as the collapse of the FTX exchange in November caused the panic of depositors and the bankruptcy of Silvergate Bank.

The reasons for Signature Bank’s downfall are a little more difficult to discover, and discussions have gone so far that digital currencies have caused a rift in the traditional banking community.

On one side of this story is Barney Frank, former chairman of the US House Financial Services Committee and one of the main supporters of the Dodd-Frank Act, which was supposed to prevent financial crises.

Frank, who is a member of the board of directors of Signature Bank, said in an interview with CNBC:

This bank was closed because the regulatory bodies wanted to send a serious message against the digital currency industry and we were sacrificed in this action; Because according to the rules, we were not bankrupt.

The New York Department of Financial Services quickly denied this, stating that its decision to close Signature Bank had nothing to do with digital currencies, and rather stemmed from a major crisis of confidence in the bank’s leadership and concerns about its ability to conduct business in a sound and healthy manner. It was sure.

Which bank may fail?

There is a lot of speculation about which bank might fail next. First Republic Bank (First Republic Bank) started to reduce its investment in digital currencies last year, but it is still suffering from the negative attitude of depositors. The bank sent an email to its customers last week, assuring them that its capital value is significantly higher than the minimum amount set by regulators, and that it has more than $60 billion in borrowing capacity.

The collapse of Silicon Valley Bank, Silvergate and Signature Bank drew attention to Cross River Bank; USDC stablecoin publisher partner, Circle Inc. in the automated settlement process.

In an interview with TechCrunch last year, Gilles Gade, founder, CEO and chairman of the bank, said that digital currency is central to their long-term strategy. He noted that Cross River Bank wants to develop more products and services in this area and move towards a digital currency-based strategy.

Of course, Gide’s view that the bank wants to move in the direction of the digital currency market may be encouraging to its current and potential customers.

However, two prominent cryptocurrency analysts, David Gerard and Amy Castor, noted that with the closure of Silvergate and Signature Bank, digital currencies have effectively been removed from the US banking system.

The two analysts see the Federal Deposit Insurance Corporation’s interventions as a warning to other banks in the United States to reform their financial offices and not serve bad customers. They wrote:

Digital currency companies are one of these customers. Previously associated with money laundering and crime, these companies are now associated with the billions of dollars that flow in and out of banks every day. It is dangerous for any bank to serve this type of customer.

These analysts added:

This is scary news for the cryptocurrency industry. Losing connection with the banking system is the worst thing that can happen to a cryptocurrency company. Unless the industry can find a reliable payment route for the US dollar that will be accepted by regulatory bodies. Cryptocurrencies have died out as a financial product in the United States.

David Gerrard notes:

It is good that digital currencies are uncensorable and unstoppable and do not need banks. But, what should we do after that?

Markets fear a repeat of the 2008 financial crisis

The collapse of Silicon Valley Bank was the largest bankruptcy in the United States since the financial crisis of 2008, albeit with a different scope than that period. The Committee of the Bank for International Settlements in 2018 also noted about the global financial system that following the market crisis, managers emphasized capital increase as a factor determining the capacity of banks to deal with adverse shocks.

Now, banks need about 10 times more capital than in 2007, and their debt levels have also been controlled. Banks must adhere to a debt ratio that specifies how much capital they must hold against their assets. Also, the new rules include stricter requirements for monitoring banks’ liquidity.

One of the most important results of the crisis that engulfed the banking sector 15 years ago was the creation of the Basel 3 framework, whose main goal is to reduce the diversification of excessive investment in risky assets. This framework was implemented in January and will be implemented in the next 5 years.

However, John Cochrane, a senior fellow at the Hoover Policy Think Tank at Stanford University, believes that the overall structure of the current financial system allows banks to take on too much debt, assuming regulators recognize the risks. . He writes in his last note:

It’s disappointing that such good people work in a system but can’t recognize something as simple as this. However, an investment portfolio consisting of long-term Treasuries is the safest possible position, unless the bank is funded by cash deposits. Why do our regulatory agencies pursue the safest assets on earth and fail? Now, it’s time to start over.

Multiple reports indicate that the Federal Reserve is taking a closer look at the supervisory process for medium-sized banks, with possible measures to increase minimum capital and liquidity requirements and more rigorous annual performance tests.

The pressure of regulatory bodies on digital currency companies

Of course, no amount of regulation can prevent a bank from going bankrupt, and the concentration of recent crises in the United States makes it more likely that cryptocurrency businesses based in the country will move to jurisdictions that are more inclined to this type of asset.

For example, the European Union is due to vote on the Markets in Crypto Assets (MiCA) Regulation next month, and the UK is deliberating on proposals for cryptocurrency legislation. A number of jurisdictions across the Middle East and Asia have shown interest in attracting cryptocurrency businesses.

Josh Olszewicz, head of research at digital asset management firm Valkyrie, told Cointelegraph this week that increased scrutiny of cryptocurrency businesses and exchanges is likely to make larger traditional banks less interested in establishing relationships with those in the cryptocurrency space. They operate.

But now, cryptocurrency businesses are leaving the US because they believe they don’t have control over their assets.