Congressional report on Crypto clears the blame for financial crisis

Congressional report on Crypto clears the blame for financial crisis

The Congressional Research Service discovered that cryptocurrency played a part in the failures of Silvergate, Silicon Valley, and Signature Bank. It did, however, state that it played an indirect role based on risk perception. The non-partisan agency published this report on Tuesday, April 25th. The agency is a trusted resource for Congress. 

Silicon Valley Bank, Silvergate, and Signature were all involved in the crypto movement. The banks were all offering services to the industry’s firms. Silvergate reigned supreme, with more than 90% of their deposits coming from crypto customers. Signature Bank, on the other hand, only had 20% of its deposits in digital assets. SVB claimed to have “minimal exposure.” But Circle’s statement that it kept $3.3 billion in stablecoin reserves at SVB caused a stir when USDC devalued against the US dollar for a short time.

Both Silvergate and Signature provided payment networks that allowed crypto clients to make real-time payments. Silvergate provided bitcoin-collateralized loans to industry players, with a total of $302 million in bitcoin-collateralized loans as of September 30, 2022.

The banks had minimal exposure to high-profile crypto business failures like Celsius and FTX. Silvergate’s exposure to FTX was less than 10%, whereas Celsius’ deposits at Signature were insignificant at 0.1%. The report also stated that the banks’ deposits and withdrawals were running in tandem. 

The financial world saw some havoc when Silvergate said it would be closing down, Silicon Valley Bank collapsed unexpectedly, leaving the investing community reeling, and authorities shut down the smaller Signature Bank. These banks were the victims of a deposit run, which means that too many clients withdrew their cash and the banks were unable to keep up. But their demise has been blamed on their friendly relationship with the crypto sector, a claim that has been refuted by congressional evidence.

As centralized crypto platforms and stablecoin issuers came across redemptions during the crypto market slump, banks lost more deposits. To meet the withdrawal demands, banks were forced to sell what they thought were safe and healthy investments at a loss. Banks were obliged to liquidate other assets at a loss due to withdrawals of crypto deposits.

Regulatory bodies like the SEC have been cracking down on the crypto industry. Demands for setting up proper rules and regulations for the industry are being made. If these frameworks are set into place, managing finances in the crypto world shall get easier. This shall also enable a firm to handle any liquidity crisis.