Senator Issues Warning: Crypto Poses Risk to Banking Stability — SVB Was Merely a “Preview”

As the Senate Banking Committee prepares to review new legislation on the structure of the cryptocurrency market this week, a senior Democratic senator has reignited discussions about the role of crypto in the U.S. financial system and its possible ties to the banking failures witnessed in 2023.

Key Takeaways

A senator warns that crypto activities may contribute to banking instability, as exemplified by the Silicon Valley Bank collapse.
Recent banking failures are linked to rapid deposit shifts influenced by the crypto and venture capital sectors.
Stablecoins, with a market value of about $300 billion, pose additional risks if not properly regulated.
The crypto industry disputes the claim that it caused banking collapses, citing mismanagement of interest rates as a primary factor instead.

Senator Warns: Crypto Threatens Banking Collapse — SVB Was Just “The Preview”

The senator claims that the failure of Silicon Valley Bank was not just a standalone incident but rather an early warning of the risks that arise when crypto-related activities intersect with an already weakened banking system.

This warning draws heavily from a detailed 292-page investigation published last September by the Senate’s Permanent Subcommittee on Investigations.

Understanding the Risks of Crypto-Era Bank Runs

In an opinion piece for Fox News, Senator Richard Blumenthal analyzed the collapses of Silicon Valley Bank, Signature Bank, and First Republic Bank, all of which had recently undergone favorable audits before their downfalls.

He emphasized that these audits concealed escalating risks associated with rapidly shifting deposits, unclear financial exposures, and a business model increasingly swayed by crypto and venture capital that moved money in and out swiftly.

According to the senator, the downfall of Silicon Valley Bank followed a predictable pattern.

During the years of low interest rates, the bank attracted substantial deposits from tech startups and venture-backed enterprises, including those in the crypto space.

However, when the interest rates increased and leading crypto companies like FTX faltered, confidence swiftly disappeared. Panic spread rapidly through digital means, and withdrawals surged at an unprecedented pace.

In response, regulators intervened to avert a broader financial crisis, committing as much as $340 billion in emergency funding. Nevertheless, over $54 billion in equity and bond value was lost.

The senator cites Signature Bank as a clearer indication of crypto-related risk. Signature had actively sought out digital asset firms, amassing a significant amount of crypto-related deposits.

Following the collapse of FTX in late 2022, those deposits were withdrawn in large numbers.

Auditors continuously assured the public that risks were being managed, only for the bank to close down a few months later.

For the senator, this incident underscores how the complexities of crypto, coupled with a lack of transparency, can outstrip traditional regulatory oversight before any meaningful action can be taken.

Furthermore, he expresses concern about stablecoins, which he characterizes as “digital dollars” marketed as substitutes for bank deposits.

With the stablecoin market currently valued at approximately $300 billion and expectations that it could multiply by four times by 2030, he warns that the potential losses could be even greater without proper regulations.

Since the passage of the GENIUS Act last summer, several prominent stablecoins have temporarily lost their value peg, resulting in the loss of hundreds of millions of dollars.

Industry Pushback Against the Crypto-Blame

However, figures from the crypto industry strongly contest this interpretation, with market analysts and executives arguing that blaming crypto for the collapse of Silicon Valley Bank misrepresents the established facts.

They assert that the core failure of SVB should be viewed as a case of mismanagement of interest rates.

The bank had invested significantly in long-term U.S. Treasuries during a period of low rates, and it failed to hedge that risk properly.

When rates increased sharply, losses became unavoidable, especially since over 90% of deposits were uninsured and largely held within an interconnected tech community, leading to an inevitable run once confidence was shaken.

Critics highlight that Silvergate Bank presents a different scenario, as its failure was directly connected to volatility in the crypto market and a loss of trust following the collapse of FTX.

Deposits plummeted by 68% in just one quarter, forcing the bank to liquidate assets at a $718 million loss.

Even in this case, defenders of crypto maintain that concentration risk and a weak balance sheet were the main issues, suggesting that the crypto market acted more as a trigger rather than the underlying cause.

They also argue against the notion that “digital-speed” runs are exclusive to crypto.

Bank runs have been observed for centuries, long before the advent of smartphones or blockchain technology. While technology may speed up these processes, it is not the root cause of the vulnerabilities.