Don’t Blame Crypto

Cryptocurrency has taken a beating in the headlines ever since the FTX scandal broke last fall. But last month it got much worse as a trio of banks known for their crypto-friendly lending collapsed, sending shock waves through the larger economy.

The fate of Silicon Valley Bank was especially egregious, representing the second-largest bank failure in U.S. history after that of Washington Mutual Bank in 2008, during a broader financial crisis. But also going down the drain were Signature Bank and Silvergate Capital Corp., two other well-known friends of fintechs and cryptocurrency.

SVB’s collapse hit crypto especially hard, impacting even well-managed companies. Circle Internet Financial, a customer of SVB, saw its stablecoin depeg from the U.S. dollar over the weekend the bank failed because of the company’s $3.3-billion in cash reserves held there to back the coin.

The knock-on effects of these events took a further toll days later when First Republic Bank, SVB’s San Francisco neighbor, had to be rescued by a hastily assembled consortium of nine banks from around the country, led by JPMorgan Chase. The institutions steadied First Republic with a $30-billion infusion of deposits after customers, spooked by SVB’s fate, rushed to withdraw their money.

But while crypto may have been a common denominator, it’s unfair to blame blockchain for what turned out to be one of the worst months in U.S. banking history. As the example of Circle demonstrates, blockchain may have been the victim in this sorry episode more than the villain.

The real culprit is interest rates, which have been steadily rising as the Fed battles to tame red-hot inflation. But when rates rise, asset values take a hit, leaving institutions with a weaker balance sheet. You didn’t have to be a genius to figure that news that inflationary pressure was scarcely under control would lead the Fed to hike rates again, making it even harder for some banks to meet customer demand for withdrawals. Indeed, First Republic may have enjoyed geographic nearness to SVB, but there’s little evidence crypto had much to do with its problems.

But crypto is an asset, as well, and ironically Bitcoin, the leading cryptocurrency, has done swimmingly through all this. After plunging in the wake of the FTX fiasco, the coin’s value has soared 70% since the start of the year, according to  data source Coinmarketcap.com. Nor is Bitcoin alone in this runup. Ethereum, the second-largest digital currency by market value, shot up 50% from the first of the year to mid-March.

Inflation stood at 6% for the 12 months through February, according to a U.S. Labor Department announcement on March 12. We can all fret about that.

—John Stewart, Editor john@digitaltransactions.net