Crypto firms such as Coinbase and Paxos among others now stare at weeks of market re-shuffle and volatility after two crypto friendly lenders were compelled to shut down their operations in the US over the weekend. These now defunct banks are the Signature Bank and the Silicon Valley Bank (SVB). The US authorities intervened and shut down the operations of both the banks citing risks to the US economy. Both lenders were left to terminate their operations between March 10 and March 12 — stirring chaos in the international financial market on Monday, March 13.
The downfall of the SVB and the Signature Bank come just days after Silvergate, another crypto-friendly bank decided to put a stop to its operations on March 9 in the aftermath of the FTX collapse that shook-up the global crypto industry last year.
A number of crypto companies now have big amounts of capital to recover from these banks to quickly retain the trust of their users against the fears of financial losses.
The Signature Bank Crumble
Founded in 2001, the Signature Bank based in New York City, was directed by the US authorities to shut its operations on March 12. Leveraging the risk factor against US’ financial stability, the United States Federal Deposit Insurance Corporation (FDIC) ordered the cash crunched bank to draw curtains on its operations with immediate effect.
The United States Federal Deposit Insurance Corporation (FDIC), that is authorised to monitor banks in the US, took the decision to shut down the Signature Bank in order to limit depositor outflows and prevent additional bank runs, CoinTelegraph said in a report.
By December 31, 2022, the Signature Bank was estimated to have nearly $89 billion (roughly Rs. 7,29,083 crore) in deposits, a significant chunk of which was held by crypto companies.
Soon after the news of Signature being shut was released, Coinbase disclosed that it held $240 million (roughly Rs. 1,966 crore) as corporate funds in Signature Bank.
Stablecoin issuer Paxos also held $250 million (roughly Rs. 2,048 crore) at Signature, alongside the financially troubled crypto lender Celsius — that chose not to disclose the size of its account with the now defunct bank.
The companies are now awaiting to get the custody of their funds back.
Collapse of the Silicon Valley Bank (SVB)
The SVB, that had been struggling to keep afloat amid the slowed down financial markets post COVID-19, began to run out of cash in-hand as the year 2023 progressed into March.
The bank caught the attention of the FDIC after it sold $21 billion (roughly Rs. 1,72,048 crore) worth of bond assets at a loss of $1.8 billion (roughly Rs. 14,747 crore) on March 8 to raise some emergency funding.
Within 48 hours of the SVB revealing that it had sold some of its assets, scared investors pulled out their holdings from the bank, leading to its collapse.
Founded in 1983, the SVB catered to a long list of wealthy IT firms. As of December 2022, the bank reportedly held $209 billion (roughly Rs.17,17,693 crore) in total assets and around $175.4 billion (roughly Rs.14,41,928 crore) in total deposits.
Its eventual shocking downfall on March 10 is being reported as the largest financial crisis after the housing market crash of 2008.
The Aftermath and the Plan Ahead
In an official post, the US Federal Reserve noted that all the depositors signed-up with these banks will be protected against any financial risks and that their funds tied to these lenders will be reimbursed.
“After consulting with the President, Secretary Yellen approved actions enabling the FDIC to complete its resolution of Silicon Valley Bank in a manner that fully protects all depositors. Depositors will have access to all their money starting Monday, March 13. We are also announcing a similar systemic risk exception for Signature which was closed today by its state chartering authority. The US banking system remains resilient and on a solid foundation,” said the Federal Reserve.
This announcement fetched profits back to cryptocurrencies, taking the market valuation to $1.03 trillion (roughly Rs. 84,07,967 crore) after it dropped to $930 billion (roughly Rs. 76,39,468 crore) on March 10.
Despite the assistance that the US government has extended to the clients of these banks — their fateful expirations have stirred concerns among members of the crypto community.
Silvergate, Silicon Valley and Signature all shuttered.
Depositors will be made whole, but there’s basically nobody left to bank crypto companies in the US.
— The Wolf Of All Streets (@scottmelker) March 12, 2023
The closures of Silvergate, SVB, and Signature create a huge gap in the market for crypto-friendly banking.
There are many banks that can seize this opportunity without taking on the same risks as these three.
The question is if banking regulators will try to stand in the way.
— Jake Chervinsky (@jchervinsky) March 12, 2023
The US Federal Reserve Board has also announced that it will financially help eligible depository institutions to help assure that banks can meet the needs of all their depositors.
Meanwhile, Rajeev Chandrasekhar, India’s state minister for technology will be meeting start-ups this week to assess the impact of the collapse of these banks on them amid rising concerns around how it would affect the Indian start-up sector.