CRS Considers Role of Cryptocurrency in Recent Bank Failures

The Congressional Research Service ("CRS") found a limited relationship between the recent failures of Silicon Valley Bank ("SVB"), Signature Bank and Silvergate Bank, and their exposure to the crypto market.

In an "Insight Report," CRS stated that while it might be "tempting to look for causal relationships" between the closings of the banks - all of which provided banking services to crypto firms - and the crypto meltdown, SVB and Signature Bank had limited exposure to crypto firms, including FTX and Celsius. In the case of Signature Bank, CRS reported that FTX and Celsius each comprised less than 0.1 percent of Signature’s deposits. CRS added that crypto withdrawals during Signature's bank run were proportional to its total crypto deposit amount.

While the banks may have withstood direct exposures to crypto firms, CRS said that public perceptions of the banks’ riskiness due to their involvement with crypto could have caused non-crypto firms to make "significant withdrawals." In the case of Signature Bank, CRS said that "losses were not realized on crypto-related assets, but crypto deposit withdrawals caused banks to sell other assets at a loss."

CRS stated that the banks’ recent failures have "renewed certain policy debates" around (i) banks’ exposure to liquidity risks due to volatility in the crypto markets, (ii) that crypto firms lack banking options and (iii) "uncertainty regarding what constitutes appropriate practices in the absence of a more robust regulatory framework."