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February 13, 2024

Review the synopsis of the 2023 bank collapse crisis. How did the market for digital assets get affected?

Following the failure of Silicon Valley Bank, which serves numerous cryptocurrency startups and venture capitalists (VCs), in March 2023, along with Silvergate and Signature, two significant banks for cryptocurrency companies, it received worldwide attention and raised concerns. This article will take another look at this scenario to see what went on and the impact it had.


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Synopsis of the bank collapse crisis.


The bank crisis of 2023, particularly the failure of Silicon Valley, Silvergate, Signature, and First Republic banks, created challenges and risks for the traditional banking system and the rapidly emerging digital currency market. This crisis had an impact on the global financial picture and demonstrated the need for a very careful balance between innovation and stability.

The CEO of SVB, Greg Becker, sold about 4 million shares on February 28, 2023. The Federal Deposit Insurance Corporation (FDIC) announced the closure of SVB later on March 10 and stepped in to protect customer deposits. The Federal Reserve System, or FED, showed up on March 31 to fully insure all SVB clients' deposits and provide liquidity to banks so they could handle bank panic.

In March, this crisis eased rapidly over a few days. The crisis was caused by specific mistakes made in risk management as well as a combination of other factors, such as high interest rates and unstable economic conditions, as well as fluctuations in the cryptocurrency market, particularly in banks such as Silvergate and Signature. The fact that both banks were the most adept at utilizing the digital currency market made their circumstances more complicated.


Supervisory authorities' warning signs alerting banks to proceed cautiously with the digital currency market.


Supervisory authorities including The Federal Open Market Committee (FOMC), The Federal Deposit Insurance Corporation (FDIC), and The Office of the Comptroller of the Currency (OCC) issued a warning that was jointly assessed regarding “the risks that digital assets posed to banking institutions.” The US banks engaged in digital asset activities were made aware of this problem by these authorities prior to the massive bank collapse crisis that came out in March 2023.

They stated their opinions that managing cryptocurrency assets on a public, decentralized, open network may not adhere to safe and appropriate banking regulations. This pointed out that the banks involved in dealing with the relatively new and highly volatile digital currency market needed to exercise caution and have clear risk management strategies.

The challenge was faced by Silvergate and Signature, the two companies most closely associated with digital currencies. It can be accessed by looking up their bankruptcy, which demonstrated the tension between stability and innovation in crucial traditional banking services like payment and settlement, which had to figure out how to meet the demands and distinguishing characteristics of the emerging digital currency market.


An urge to develop the adaptation of financial models in the context of traditional finance and digital assets


The bank collapse crisis of 2023 not only exposed the specific errors made, but also demonstrated the broad range of difficulties financial institutions faced in integrating their digital assets with traditional banking models. As a result, the primary issue that requires attention is achieving a delicate balance between innovation and stability maintenance. This includes the need to examine how financial institutions will adjust to the shifting landscapes of digital assets.


How has this crisis affected the cryptocurrency market?


For technology startups, Signature, Silvergate, and SVB are the largest banks and have the strongest ties to the digital asset industry. They all fell apart in less than a week, which at the time reduced the liquidity of Bitcoin and the cryptocurrency market as a whole. Later on, the price increased as the government got involved to provide support by insuring all of the customers' deposits at these banks. This only slightly increased confidence and inspired hope for the cryptocurrency community. Still, the stablecoin market was uncertain as a result of this circumstance.

"Nic Carter," a co-founder of Castle Island Ventures (VC investor), shared his thoughts on the government's effort to assist collapsed banks, giving them the ability to acquire liquidity and loosen financial regulations, which helped the digital currency and other speculative asset sectors. But he said it was disappointing to see these major banks that were supportive of the cryptocurrency industry shut down in a few days because there were not many options available to crypto businesses these days. Up until the arrival of new banks, the sector was still confronted with the liquidity issue.

In addition, this circumstance affected stablecoin's volatility, as stablecoin is a component of the cryptocurrency ecosystem that investors generally utilize to keep prices stable. The value of the stablecoin is tied to tangible assets like fiat currencies (such as the US dollar or commodities like gold). However, unusual financial situations such as this large-scale scenario could lead to a price decline below the fixed amount.

From another perspective, the digital asset sector found a solution when "Mike Bucella," a longtime executive and crypto investor, expressed the belief that many in the industry were depending on other alternative banks. Axos and Mercury, for example, are two banks that assist startups. The cryptocurrency startup "Circle," which introduced the USDC coin, made the announcement in public that "BNY Mellon" bank would be handling its asset custodianship.


Regarding the situation in Thailand


The Bank of Thailand has announced that the impact of the SVB case on Thailand's financial system stability is limited due to the absence of any Thai commercial banks having direct transactions with SVB. Additionally, the overall transaction volume of the Thai commercial banking group in Fintech and startups worldwide is less than 1 percent of the group's related capital funds. Furthermore, the commercial banking group holds digital assets amounting to approximately 200 million baht, which is low.

However, Bank of Thailand has emphasized that it strictly regulates digital assets and Venture Capital transactions. For example, it sets investment ceilings and regulates various risks to prevent the impact of linkages between commercial banks on public deposits. In addition, all cryptocurrency investments are deducted from Tier 1 capital (Common equity tier: CET1).

The Securities and Exchange Commission (SEC) has also revealed guidelines for supervising digital asset businesses to prepare for risks in the global financial situation. For example, the regulatory mechanism for digital asset businesses under the Digital Asset Business Act (DABA) focuses on ensuring that businesses have a strong and adequate financial position to support risks and provide continuous services. The SEC also has guidelines for adjusting regulations to keep pace. The SEC has been monitoring the digital asset market development to keep pace with risks and align with regulatory approaches in other countries.


Conclusion 


The bank collapse crisis in 2023 was caused by failures in risk management and had a limited impact on startups, which received immediate government assistance. However, it still affected confidence in the global capital market. In spite of this, the bank collapse crisis of 2023 has highlighted the fragility of the banking sector when challenged by digital currencies. The collapse of a reputable bank underscores the need for scrutiny of regulations, risk management, and approaches to integrating innovative financial technologies with accepted banking practice

Source:
- The block pro research
- https://www.cnbc.com/2023/03/12/signature-svb-silvergate-failures-effects-on-crypto-sector.html
- https://www.investopedia.com/what-happened-to-signature-bank-7370710

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