Banking Sector Needs Crypto-Style Oversight in the Wake of SVB
It has been a precarious first quarter for the global financial markets. Synchronized central bank interest rate hikes raised the threat of an economic recession entering 2023.
In January, the World Bank raised concerns about central banks lifting rates in a synchronized fashion. However, the voices of concern fell on deaf ears. The Fed and other central banks were too eager to remedy their wrongs.
With central banks focused on inflation, the US administration, lawmakers, and regulators redirected their attention from the banking sector to the digital asset space.
The FTX Bankruptcy
In November 2022, FTX filed for bankruptcy, giving the anti-crypto side of the aisle a louder voice and leading to the White House calling for increased regulatory activity and scrutiny of crypto assets and exchanges in the interest of retail investors.
The collapse of FTX could eventually lead to sizeable customer losses. However, the final number may be significantly lower than initially thought. In January, FTX bankruptcy lawyers reportedly recovered more than $5 billion in cash & cash equivalents. The firm also plans to sell non-strategic investments with a book value of $4.6 billion.
While the numbers are substantial, FTX contagion was relatively contained. Notably, the broader crypto market has since recovered and moved beyond pre-November 2022 levels.
Silicon Valley Bank and Signature Bank Collapse Under the Fed Watch
However, some have accused the Federal Reserve and the US government of dropping the ball. In March, two US regional banks collapsed. Silicon Valley Bank (SIVB) and Signature Bank (SBNY) become the second and third largest banks to collapse in US history. The largest was Lehman Brothers.
The US government and regulators have ensured that depositors do not lose out. However, the cost of ensuring that banks remain liquid has run into the hundreds of billions. US banks reportedly borrowed about $300 billion from the Federal Reserve in just one week. $143 billion went to holding companies to pay off uninsured depositors of the two failed banks.
Crypto No Risk to Global Financial Stability
To put it into perspective, the US Administration is hellbent on bringing the crypto market down over a few billion dollars. The numbers suggest that there is more behind the anti-crypto rhetoric and regulation by enforcement than a $1,000 billion industry. The largest US blue chip company towers over the total crypto market.
As of December 2022, the New York Stock Exchange (NYSE) and the NASDAQ held a combined market cap for domestically listed companies of approximately $40 trillion.
Several US companies have market caps equivalent to or larger than the total crypto market capitalization. These include Apple Inc. (AAPL), Microsoft (MSFT), and Amazon.com (AMZN).
Considering the size of the US banking sector bailout and the market cap of the largest US-listed companies, the US Administration and the Federal Reserve should have focused on the banking sector.
Looking Forward Is Better than Looking Backward
The fallout from the collapse of SVB and SBNY is yet to wash out through the banking sector. One week after the closure of SVB, the Swiss Government convinced UBS AG (UBS) to acquire Credit Suisse Group AG (CS). Credit Suisse bondholders lost a whopping $17.5 billion. The terms of the UBS acquisition wiped out the bank’s additional tier-1 bonds (AT1).
And yet, as the dust settles, the SEC and the US Administration retargeted the digital asset space. It is unclear whether the latest moves were to distract investors from more significant issues. But, considering the numbers alone, the collapse of banks and the likely credit crunch that follows will have a far more catatonic impact on consumers and the global economy.
Fed Chair Powell delivered the warning in the Fed press conference, with the banking crisis expected to force the Fed to pause its targeted policy moves to bring inflation under control.
The bankruptcies of FTX, Voyager Digital, and others have not impacted financial stability.
SEC v Ripple Result Could End Anti-Crypto Rhetoric on Capitol Hill
Perhaps the US approach is to allow enough US investors to lose their investments to bring the crypto market to its knees. Ultimately, the US administration and the SEC will likely fail to bring down the crypto market. However, they may succeed in losing out to crypto-friendly jurisdictions that embrace innovation.
The crypto market has developed sufficiently to become more than a hotbed for criminal activity. It may be time for Capitol Hill to accept the existence of the crypto market and introduce a regulatory authority that can build a regulatory framework that embraces innovation while protecting investors. Undoubtedly, there needs to be a shift from terminologies such as securities and commodities.
An appropriate regulatory framework can address the negative aspects of the digital asset space while allowing the sector to thrive. Satoshi Nakamoto had a vision and achieved his goal by providing the global population with an alternative to the dollar. One global financial crisis and one banking crisis later, the US government still fails to see the benefits.
Perhaps the result of the SEC v Ripple case could ultimately decide the fate of the US position within the global crypto market.
Banking Sector and Fed to Face heated Questions on Capitol Hill
Last week, US Senator Elizabeth Warren requested an investigation into the collapse of Silicon Valley Bank and Signature Bank (SBNY). The Senator did not mince her words. Warren assigned responsibility to bank executives and the Federal Reserve for regulatory rollbacks that allowed the failures to happen.
On Tuesday, March 28, the Committee on Banking, Housing, and Urban Affairs will meet in open session to conduct a hearing on “Recent Bank Failures and the Federal Regulatory Response.”
Following a string of anti-crypto sub-committee hearings on Capitol Hill, including hearings on Bitcoin (BTC) mining, the Tuesday hearing will draw interest globally.
How can an administration and lawmakers take a softer approach with a sector that could bring down the global economy for the second time in 15 years?
Things could become even more troublesome for the US Administration should BTC strengthen its status as a safe-haven asset.