Crypto Did Not Collapse Signature, Silvergate, and SVB, and Exposure to FTX Was Minimal: Congress Report

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(Kitco News) – A new report from the Congressional Research Service (CRS) has shown that crypto losses did not cause the collapse of Silicon Valley Bank and Signature Bank, or even Silvergate, but the fear of crypto exposure was driving the bank runs. .

CRS, a nonpartisan agency that acts as a trusted resource for informing members of Congress, released The Role of Cryptocurrency in the Failures of Silvergate, Silicon Valley and Signature Banks on Tuesday. The report contradicts the popular narrative that the bank failures were caused by large exposure to FTX and other bankrupt crypto firms, or losses from their own crypto products, although it acknowledged that 90 % of Silvergates deposits came from crypto clients at the time of its collapse, which was actually down from over 98% at the end of 2021.

It is tempting to look for causal relationships between bank failures and specific crypto industry failures, the report states, noting that even banks that have done business with high-profile crypto failures, such as Celsius and FTX, only had limited exposure to their collapses.

At Silvergate, exposure to FTX was limited to holding deposits, which represented less than 10% of Silvergates total. Celsius reportedly held $130 million at Signature, which in July 2022 was just over 0.1% of Signatures’ total deposits. While FTX held deposits at Signature, these also accounted for approximately 0.1% of Signatures’ deposits.

The report cites congressional testimony from New York State Department of Financial Services Superintendent Adrienne Harris, who called allegations that Signature failed due to crypto a misnomer and said that crypto withdrawals during the bank run were proportional to the bank’s total crypto deposits.

Even Silvergates Bitcoin-backed loans, which the report said were perceived as risky due to Bitcoin’s volatility, worked as expected, with no losses or forced liquidations, company CEO Alan Lane told a conference. telephone call with the SEC on January 17.

That said, a bank’s perception of risk due to its crypto exposure may have prompted non-crypto businesses/individuals to make large withdrawals, CRS wrote.

The report states that the problems for these banks began when crypto prices fell precipitously throughout 2022. As digital asset prices fell, centralized crypto platforms and stablecoin issuers saw takeovers , likely forcing them to dip into deposits held at those banks, they wrote. To meet withdrawal demand, banks sold seemingly safe securities for losses, affecting their liquidity and, in some cases, their solvency.

Silvergates deposits fell more than 50% in the fourth quarter of 2022, the report notes, while Signatures deposits fell about 15% over the same period. So, in this case, losses were not realized on crypto-related assets, but crypto deposit withdrawals caused banks to sell other assets at a loss.

The report concludes by saying that the loss of two crypto-friendly banks has reignited concerns about the lack of banking options for crypto firms, and that while banking regulators say banks were neither banned nor discouraged from banking crypto companies, banks could still reject the industry. .

The hesitation to crypto banking may also highlight broader uncertainty about what constitutes appropriate practices in the absence of a more robust regulatory framework, they wrote.

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