Signature Bank on Sunday became the latest domino to fall in a reckoning that is expected to have widespread ripple effects not only for banking but for the burgeoning cryptocurrency industry. The New York City-based bank, closed by state regulators, is said to be the third-largest bank failure in U.S. history. Its collapse follows the Friday shutdown of crypto-oriented Silicon Valley Bank, an action that represented the second-largest bank failure after that of Washington Mutual Bank, which fell victim to the 2008 financial crisis.
The failure of both institutions is a blow to the burgeoning but troubled cryptocurrency industry, as the banks served as key on-ramps for customers seeking to convert fiat money to Bitcoin and other crypto coins. They also helped crypto startups looking for financing, observers say. The loss of Silicon Valley Bank, in particular, “will have a wide-ranging impact” on the prospects for cryptocurrency, notes Cliff Gray, a senior associate at the Omaha, Neb.-based consultancy The Strawhecker Group who follows the cryptocurrency business.
But the events of the weekend could have an even deeper impact, observers warn, on the prospects for widespread consumer acceptance of the blockchain technology that lies at the root of cryptocurrency. ‘What the public is seeing is one failure after another,” says Gray, who also points to the bankruptcy in November of the big digital-currency exchange FTX.com and, last week, the collapse of Silvergate Financial Corp., another lender to crypto firms. The U.S. Treasury said late Sunday it would back all deposits at SVB.
Silvergate in February last year had agreed to pay $182 million in cash and stock to acquire the Diem Group, manager of a stablecoin venture that had been launched by Facebook Inc. in 2019 under the name Libra. Facebook in 2021 changed its name to Meta Platforms Inc.
The events of the weekend “further ingrains in the public mind that this experiment in crypto is not working, which is too bad because the blockchain is a revolutionary tool,” notes Gray. The news has also rattled investors, especially as withdrawals helped spur the failure of SVB, the sixth-biggest lender in the United States.
In response to the emergency at Signature Bank, the Federal Deposit Insurance Corp. on Sunday stepped in to set up a so-called bridge successor bank to let customers access their money on Monday. SVB customers will also be able to access deposits Monday, Reuters reported. The news service also reported that “certain” unsecured debtholders of both banks would not be protected by the government’s action, while “senior management” at both institutions was let go.
Ironically, says Gray, the three banks were “all striving for a bankless way of moving money. Yet what they need now is traditional oversight.”