Introduction

2023 had barely finished its first quarter when we witnessed several large-scale bank failures in the year. While there are several reasons behind the unfortunate incidents in the banking sector, stakeholders of the crypto space have been left worried in anticipation of the effects of these bank failures in the crypto market.

Why did so many reputed banks collapse in 2023? In this article, we try to discern the reasons and explore the various after-effects of the banking crisis of 2023 on the crypto market. Read ahead to learn in detail about the future of crypto and banking with the lessons learned from the ongoing crisis.

The banking crisis of 2023

Source |How do bank failures of 2023 affect the crypto market?

Three major bank failures were responsible for the banking crisis in 2023:

1. Silvergate Bank: Silvergate Bank was a large financial institution dealing with crypto firms in the United States. After the collapse of FTX in 2022, the bank was flooded with requests for withdrawals worth over $ 8 billion. Moreover, over 90% of the bank’s deposits were related to the crypto market.

Since Silvergate Bank did not have enough liquidity to process the withdrawals, it sold assets at huge losses. Unable to continue sustaining its increasing losses, Silvergate Bank liquidated, sending extreme bearish signals across the crypto market.

2. Silicon Valley Bank: Silicon Valley Bank or the SVB was a prominent bank that held deposits from start-ups worldwide in government bonds of the United States. With rising interest rates, the value of these bonds dropped by a large margin, prompting the bank to sell them.

Eventually, this sale proved to be a wrong decision as Silicon valley bank’s share price dropped considerably, prompting depositors to withdraw their holdings. Unable to service these withdrawals, the bank had a huge liquidity crisis.

3. Signature Bank: The Signature Bank crisis was another big hit for associated crypto companies. As the crypto market continued to lose value towards the end of 2022, Signature Bank lost the trust of depositors, as a result of which its stock price declined by over 20% on a single day. Subsequently, regulators in New York closed the bank.

All the above bank failures, coupled with those at other institutions such as Credit Suisse, led to a ripple effect across markets worldwide, with investors and traders in the crypto market witnessing significant losses.

How was the crypto market affected?

Among the aforementioned institutions to go through bank failures, both Silvergate and Signature were primarily serving crypto companies, while even Silicon Valley Bank (SVB) had several crypto startups and venture capitalists among its clientele. Therefore, understandably the downfall of these banks makes it harder for crypto companies to borrow funds. As a result, liquidity across crypto markets might take a hit in the short term.

On the other hand, in the long term, these banking crises could encourage greater caution among other banks that support crypto companies and provide regulators with an opportunity to offer more clarity regarding the crypto sector in terms of regulations to avoid such events.

As expected, while the crypto market was affected initially by these bank failures, witnessing steep losses, it managed to make a major recovery from its lows within a very short period. What’s more, the bank failures of 2023 have created opportunities for rival banks to step up and support crypto markets better.

The way ahead for crypto with the banking industry

The bank failures of 2023 have taught a few lessons to the crypto industry, the most prominent of them being:

• A lot of questions were raised about the corporate governance and risk management practices of the collapsed banks. As such, it would be very important for crypto firms to only deal with banks with a healthy track record and transparent regulatory practices.
• The lack of liquidity was a major reason for the bank failures. Going forward, banks with sufficient liquidity should be the top preference for crypto companies.

The role of regulation in crypto banking

Regulation is extremely important in crypto banking for businesses in the space to operate more efficiently and effectively. Consumers can also make more informed decisions when they know the regulatory requirements. Further, regulation may of course lead to yet more innovation in crypto banking.

What’s more, regulation in crypto banking can help to prevent fraud and other criminal activity. By requiring businesses to follow certain procedures and disclose certain information, regulators can help weed out those trying to take advantage of the system. This protects both consumers and businesses from becoming victims of fraud.

As the crypto industry continues to grow, the role of regulation is becoming more evident in the sector. In the coming times, we expect to see the Indian government taking the clear initiative to lay down a set of rules governing the crypto markets and all involved institutions.

What’s Next for the Crypto Market in 2023?

As central banks worldwide move towards regulating crypto and digital assets, the prospects of crypto banking are surely bright for the near future. As we saw from the recent bank failures, only the most well-liquidated and regulated banks could cater to the crypto industry in the long run.

On their part, crypto firms have learnt some important lessons from the bank failures of 2023, which could help them avoid such financial institutions in the future.

We hope this post helped explain how the recent banking crises in 2023 affected the crypto markets, and what lessons to take away!

If crypto is a sector that interests you, and if you want to start out with crypto trading, Giottus may be just the platform for you! To find out more, give our website a visit today!

Disclaimer: Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions.