Crypto Not To Blame For Bank Collapses, Treasury Official Says

Updated: 30 March 2023

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Various crypto-friendly banks have recently collapsed, including Silicon Valley and Signature Bank. However, the United States Treasury Department’s undersecretary for domestic finance, Nellie Liang, believes that the crypto or digital asset sector should not be blamed for the banks’ demise earlier this month.

In a hearing of the House Financial Services Committee conducted on March 29, Liang noted:

“I don’t believe that crypto played a direct role in either of the failures.”

Nellie Liang, the U.S. Treasury Department's undersecretary for domestic finance, doesn’t believe the digital assets sector should be blamed for the runs on SVB and Signature Bank that led to their quick demise earlier this month. "I don't believe that crypto played a direct role…

— Wu Blockchain (@WuBlockchain) March 30, 2023

She further asserted that the American economy relies on a healthy and diverse banking system. Liang noted that the Treasury continues to monitor developments across the banking and financial system. She said:

” We think the system has stabilized. We have information and confirmation that deposits have stabilized.”

Additionally, Liang noted that the regulators must address reforms to address moral hazard concerns. However, Liang was further asked whether the digital assets sector had any indirect factor that led to the collapse of the banks. Liang gave her remarks, noting that Signature Bank was certainly active in the sector, without elaborating further.

Notably, over the past two days of hearings examining the failures of the crypto-friendly banks (SVB and Signature), minimal attention has been drawn from the Senate and House of Representatives members, considering the link or relationship between the crypto industry and the banks.

According to the two regional lenders and a smaller institution, Silvergate Bank regulators noted that the banks took business risks that undermined their resilience. On the other hand, the Federal Reserve Vice Chairman for Supervision, Michael Barr, noted:

“The trouble with Silicon Valley Bank, for instance, was rooted in classic interest rate risk management.”

The Banks’ Uninsured Deposits

Noteworthy, the banks held many uninsured deposits from the crypto platform. The volatility from the ecosystem and the rapid withdrawal of funds as the crypto space struggled with the ongoing turmoils partly led to the unprecedented rapid collapse of the banks. This is true as the stablecoin issuer, Circle, confirmed that $3.3 billion in cash deposits remained at the collapsed SVB after suffering a run of deposits.

However, in the long two days of a congressional hearing, the lawmakers seem to have scant interest in focusing on crypto questions. According to the hearings, it is worth noting that the regulator’s and lawmakers’ primary concern is the problems in the bank’s management. Additionally, a potential downturn in supervision by the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC). The discussions concerning potential new regulatory legislation targeted questions over the banking sector’s capital and liquidity cushions. And not on the bills that might deal with the crypto failure.

The Crypto Tangent

On the other hand, New York’s financial regulator recently noted in a report by Reuters that its decision to close Signature Bank “had nothing to do with crypto.” Contrarily, according to the State Department of Financial Services spokesperson, the agency’s decision” stemmed from a significant crisis of confidence in the bank’s leadership.”

However, on Tuesday, the FDIC asserted that it is contacting depositors from Signature Bank, whose deposits are not included in the Flagstar bid. FDIC is still wrestling with some $4 billion in crypto-related deposits in Signature Bank. Notably, the FDIC alerted the Signature bank crypto clients to move their funds to other banks and close their accounts by April 5. Significantly, any deposits that will not be transferred or taken out by April 5 will be liquidated, and regulators will mail cheques to the recorded addresses.