Silvergate Bank’s Troubles Signal Challenges for Crypto Sector
Another bank supporting cryptocurrencies has faced collapse with the demise of Signature Bank in New York. However, experts suggest that the unstoppable nature of cryptocurrencies is now apparent.
The bank’s failure, which occurred over the weekend, is the latest in a series of bank collapses causing widespread concern in global financial markets, with many fearing an impending banking crisis.
The crypto industry has been particularly impacted as Signature Bank played a crucial role for companies in this sector.
Despite Treasury Secretary Janet Yellen’s assurances of “decisive actions” to restore confidence in the banking system, shares of major US banks saw a significant decline during Monday morning’s Wall Street trading.
Shortly before the weekend, Signature Bank’s problems emerged following the collapse of two other banks focusing on technology and cryptocurrencies, namely Silvergate Capital and Silicon Valley Bank.
Silvergate Capital is widely recognized as one of the most supportive banks for cryptocurrencies in the US, having collaborated with leading crypto companies like MicroStrategy owned by Michael Saylor. The bank suffered from the decline of FTX in November last year, resulting in a run that led to selling $5.2 billion in debt securities at a loss.
On the other hand, Silicon Valley Bank is a significant banking partner for California-based startups and venture capitalists and has been employed by Circle, the issuer of USDC. The bank’s collapse is now the second-largest bank failure in US history.
The forced closure of Signature Bank was technically initiated by the government, as regulators took action on Sunday to shut down the bank.
As a result of this regulatory action, all depositors of the bank will be fully compensated, similar to the government’s promise to depositors of Silicon Valley Bank. Furthermore, in a joint statement, US regulators stated that taxpayers would not incur any losses.
“Shareholders and certain unsecured debt holders will not be protected. Senior management has also been removed. Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law,” the statement said.
Despite a pessimistic outlook from crypto industry companies, spot bitcoin prices have risen sharply on Monday. This increase could be attributed to depositors seeking a secure haven from the collapse of banks.
Bitcoin’s emergence can be traced back to the Global Financial Crisis, created in response by an anonymous individual known as Satoshi Nakamoto. Nakamoto envisioned a decentralized and transparent payment system, free from the control of large banking conglomerates.
Ironically, Bitcoin and other cryptocurrencies have become heavily intertwined with Stock Market 2.0, rather than the financial utopia Nakamoto envisioned. Recent events have shown that the value of these digital assets is still influenced by banks and consumer confidence.
Perhaps we will see a decoupling from the stock markets?
Notably, the rise of Bitcoin was also inspired by the gold standard, now abolished. Similar to gold, Nakamoto aimed to create a stateless cryptocurrency for global use with a limited supply. Currently, there are only 21 million Bitcoins, and not all have been mined. This scarcity is comparable to how banks and governments cannot create more gold.
With the scarcity reducing further with the upcoming halving, and banks appearing rather unstable, will more people flock to Bitcoin as a safe haven?
So far, they are.
Bitcoin is up 24% as of writing since Friday, with more possible gains if favorable CPI data is released tomorrow.
