Regulators Just Shut Down a Crypto Lender to Stem a Growing Financial Disaster

Things aren't looking great, folks.

Seize Up

The fallout from the government seizure of Silicon Valley Bank continued apace this weekend with the regulator-mandated shutdown of Signature Bank, which is known as a big cryptocurrency industry lender.

In a jointly-released statement, the Treasury Department, Federal Reserve, and Federal Deposit Insurance Corporation cited the "systemic risk" posed by the bank, which, as the New York Times noted, was likely related to the fact that nearly 90 percent of its deposits were uninsured at the end of 2022 per regulatory filings.

The latter is a particularly big deal because, according to the bank's own protocols, only deposits of $250,000 or more would be insured — and given that many of its lenders paid in crypto, whose value plummeted last year, their money is now worth much less than it once was.

In fact, over the weekend, crypto markets hit a near-two-month low, with Bitcoin falling below $20,000.

"All depositors of this institution will be made whole" the joint filing declares, which in English means that the New York-based bank has to pay back everyone who put their money into its hands. The agencies plan to ensure this with the creation of a special emergency insurance fund for people who deposited their money with Signature and SVB.

Crash and Burn

As the NYT notes, Signature Bank was one of the first major financial institutions to begin taking crypto deposits in 2018, and although its confidence in digital assets initially bore fruit, it now appears to be intertwined with its destruction.

"This story has more to do with crypto, huge error in judgment by veteran bankers," Christopher Whalen, the owner of the Whalen Global Advisors analysis and consulting firm, told the paper of record. "Result was the same in a deposit run."

With bank runs, or a rush to withdraw money due to financial instability, being at the heart of some of the biggest crypto crashes last year and the collapse of SVB, regulators are now rushing to stem the tide of an all-out banking crash.

Things are, once again, looking pretty dire in both the crypto and fiat financial industries, which again forces us to beg the question: who let it get this bad in the first place?

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