Following last year’s collapse FTX cryptocurrency exchangethe collapse this week of Bank of Silicon Valley and Signature Bank – representing the second and third largest bank failures in US history – renewed lingering questions about the role cryptocurrency plays in financial sector failures.
Signature Bank, known for its cryptocurrency trafficking, came under fire last year during the collapse of FTX and crypto hedge fund Alameda Research. At Silicon Valley Bank, which is known for serving technology and startup sectors Since its founding 40 years ago, the withdrawal of large cryptocurrency deposits has added to the fear fueling the banking race that ended with the bank collapsing on Friday.
However, experts told ABC News that cryptocurrency has not played a prominent role in bank failures, although the collapses have ramifications in the cryptocurrency industry.
“I don’t think crypto plays a big role,” said David Yermack, professor of finance at NYU’s Stern School of Business. “Crypto is more or less a bystander in all of this, just like every other company that has deposited money.”
Yermack, who teaches a course on cryptocurrency and blockchains, said that while the situation remains fluid, two main factors seem to have contributed to the failures: the banks that failed were too concentrated in one sector and the deregulation of the banking sector over the past five years. or six years has weakened the regulations.
“In the case of Bank of Silicon Valley, [the concentration] would be the west coast tech industry,” Yermack told ABC News. they can’t all pay you back together — that makes these loans much less valuable.”
Patricia McCoy, a law professor at Boston College, said the bank’s collapse was accelerated by its large holdings in the USDC cryptocurrency, which is managed by financial technology company Circle Internet Financial.
“At Silicon Valley Bank, really, the only role the crypto industry played was this big Circle deposit, which was very risky,” McCoy said. “When Circle became nervous that Silicon Valley Bank was in trouble, its natural response was to withdraw this very large deposit in full immediately.”
“Silicon Valley Bank didn’t have the money – the money – to pay all the withdrawal requests,” McCoy said. “So the fact that Circle has such a large deposit, and that it’s a panic-prone type of customer, has escalated the banking panic at Silicon Valley Bank.”
Regarding the recent deregulation of the banking sector, Yermack pointed to the investment by banks of large amounts of capital in Treasury bonds, which are generally very safe. However, Yermack said, “because interest rates have changed so much over the past year, these bonds have lost value – and by accounting rules, banks could still count them at 100 cents on the dollar.” .
Simply put, Yermack said, banks didn’t have to account for the depreciation in the value of bonds, which made them much safer than they actually were.
“It gets right to the heart of the problem of supervising and regulating banks – that they really should have written down these bonds in real time and made the problems more apparent much earlier,” he said.
“As someone who deals with financial data on a daily basis, I think everything should be valued at market value,” Yermack said. “And to the extent that you don’t, you run the risk of misleading people, and it seems that in this case it was the banking regulators who were misled, and they just said, ‘Oh, those are government bonds. These are the safest assets. ‘”
“But government bonds can lose value like anything else,” Yermack said. “And I think … regulators were kind of caught off guard – and oblivious – by that.”