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A tale of three: Lessons learned from a modern banking odyssey
The failure of these banks serves as a reminder that digital currencies have a long way to go before they can substitute traditional currencies.
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Bracing: An employee holds open a door at Silicon Valley Bank’s downtown San Francisco branch in California on March 13, 2023. (Reuters/Kori Suzuki)
T
he collapse of three United States banks, Silvergate Bank, Silicon Valley Bank and Signature Bank, sent ripples through both the banking and cryptocurrency industries this month. The three banks, which focus on technology start-ups and digital assets clients, experienced setbacks due to soaring interest rates, customer withdrawals and regulatory pressures.
Silvergate Bank had close ties to FTX, a bankrupt cryptocurrency exchange accused of fraud by the US Department of Justice. It announced on March 8 its intention to wind down operations and voluntarily liquidate after suffering losses related to the dramatic collapse of crypto-exchange FTX. Silvergate reported a one-billion-dollar loss as investors raced to withdraw their deposits.
Silicon Valley Bank or SVB was the 16th-largest bank in the US, which provided banking services to nearly half of all US venture-backed technology and life-science companies in the US. It also made significant investments in long-term US government bonds, which lost value when the Federal Reserve (Fed) raised interest rates. SVB failed on March 10 after a bank run by its tech customers, who withdrew their deposits. It was the second-largest bank failure in US history, and the most significant since the 2008 financial crisis.
Signature Bank, a regional bank based in New York, rose to prominence in cryptocurrency lending by accepting crypto deposits and establishing a 24-hour payments network for crypto clients. On March 12, Signature collapsed after customers, spooked by the SVB failure, withdrew more than US$10 billion in deposits. It was the third-largest bank failure in US history.
The repercussions stemming from these bank failures were notable. Regulatory bodies and investors scrutinized risk-management methodologies and the extent to which financial institutions were exposed to volatile assets like cryptocurrencies. The irony associated with these failures is hard to ignore.
Technology advancement and cryptocurrencies were previously viewed as a potential remedy for the public's distrust in traditional banking institutions following the 2008 Lehman Brothers bankruptcy. It may now be perceived as a contributing factor to the problem in the modern banking industry.
Decentralized digital currencies, according to proponents, could provide a more transparent, secure and efficient alternative to traditional fiat currencies. However, as recent events demonstrate, cryptocurrency is not immune to fraud, manipulation or market fluctuations.
