Silvergate and Signature Bank failure marks major setback for crypto industry

The banking sector’s brief role in crypto markets has hit a serious roadblock following the dramatic downfall of two highly specialized tech banks, Silvergate and Signature Bank. As Crypto’s market penetration has grown to 29% globally, the fallout from the failure of supportive institutions will be widely felt, according to GlobalData, a leading data and analytics company.

Jack Chiswell, Associate Analyst at GlobalData, comments: “As the crypto markets entered potentially their worst ‘winter’ yet, many firms in the crypto ecosystem suffered large drop offs in business. This caused deposits at crypto-friendly banks to shrivel as companies drew on reserves, while simultaneously balance sheets took a beating from markets. Assets at Silvergate and Signature were liquidated at substantial losses to facilitate withdrawals but eventually could not cover withdrawal demand.” 

Risky digital assets held by both the banks and their clients were particularly sensitive to interest rate rises due to the distant returns from these companies – amplifying risk – while runs were incentivized by sizable deposits above protected allowances. Although many banks face this challenge with their increasing Crypto-focused clients, their client base was significantly more diversified reducing exposure.

Jack continues: “Signature and Silvergate will be seen as examples of the risks of association with the digital economy. However, lack of diversification is the main driver of these runs as the banks deposit base was heavily skewed towards the struggling Crypto and Tech industries. Nonetheless, banks and regulators will look to minimise these perceived risks and distance themselves from Crypto. As a result, Crypto firms should expect the payment and funding solutions which they rely upon to become harder to come by.”

A supportive banking environment is essential for Crypto, as startups must sustain large losses before becoming profitable and many require traditional banks to facilitate non-crypto transactions. While regulators reshape crypto rules, banks reduce exposure to high-risk firms, and the digital economy remains hamstrung by high rates and slowing consumer spending, crypto will suffer from both real and reputational damage.”

Jack concludes: “Crypto’s foothold in the mainstream financial system will come under immense scrutiny in 2023, leading to falling Crypto penetration among retail investors in the short to medium term as confidence in the asset class is diminished. The Americas, particularly in the US where a significant part of Crypto funding and ventures reside, will notice the most dramatic shift. As the two most significant Crypto banks fail, they will leave a void that other institutions will be hesitant to fill.”