Collapse of three US lenders rattles crypto markets

The closures of Signature Bank, Silicon Valley Bank (SVB) and San Diego-based regional lender Silvergate are sending shock waves through digital asset markets although Irish and European regulators remain confident that the risk to the traditional financial system from a plunge in crypto assets remains minimal.

Silvergate, which has become a mainstay lender for crypto companies in recent years, was forced to close its doors last week after a run on deposits.

The announcement came just days before Silicon Valley Bank, a significant investor in the Irish start-up sector through its partnership with the State-backed Irish Strategic Investment Fund, was taken over on Friday by the Federal Deposit Insurance Corporation, which is acting as receiver.

Then on Sunday, the US Department of the Treasury announced that New York regulators had shuttered Signature Bank over the weekend due to systemic risk. The bank operated a payment network that allowed commercial crypto clients to make real-time payments in dollars and had $16.5 billion (€15.5 billion) in crypto-related client deposits as of March 8th, Bloomberg reported on Monday.

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The moves have rattled markets, with traditional banking stocks and crypto asset prices – which are still recovering from last year’s rout – tumbling over recent days. Austin Campbell, an adjunct professor at Columbia Business School in New York, told Bloomberg on Monday that “crypto has basically been de-banked” in the US as a consequence of the closures.

On Friday, shares in the world’s largest crypto trading platform, Coinbase, which employs some 130 people in Dublin, shed 8 per cent amid the general turmoil. Over the weekend, the USDC stablecoin – a variety of crypto asset, pegged to and backed by a liquid asset – depegged from the US dollar after the coin’s issuer, Circle, announced that it had a $3.3 billion (€3.1 billion) exposure to SVB.

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Up around 24 per cent this year, Bitcoin, the most popular crypto asset by market cap, tumbled more than 8 per cent to $19,289.57 (€18,132.66) in the five days to Sunday but has since recovered after US financial authorities announced measures to guarantee money held in accounts at Silicon Valley Bank (SVB) and Signature Bank.

Investors are bracing for more turmoil in the days ahead. However, regulators, in Ireland and Europe more generally, maintain that volatile crypto asset prices currently present little systemic risk to traditional financial system.

Governor of the Central Bank of Ireland Gabriel Makhlouf told an Oireachtas committee earlier this year that the threat from crypto to financial stability is “minimal,” but “guardrails” are needed to protect consumers from risks. He said that the risks are present more so on the consumer side of the equation, adding that the assets are of “no social value whatsoever”.

Speaking to The Irish Times before the Silvergate and Silicon Valley Bank closures, Sharon Donnery, deputy governor of the Central Bank with responsibility for financial regulation, said there is “a lot of concern globally” around crypto and the threat it poses to financial stability.

However, she said: “I think the view at the moment is on that sort of wider big picture risk, that is not yet a reason for a significant concern. But obviously, the sector is becoming bigger and more interconnected with the system and that is the context [for the governor’s comments].”

Bracing for more volatility this week, investors and regulators are watching for any signs of contagion in the wider financial market in the days and weeks ahead.