The cryptocurrency market has been blamed for the banking crisis that has hit many countries in the world in 2021. Steven Gensler, Chairman of the US Securities and Exchange Commission (SEC), has been vocal about his opinion that the banking sector is in jeopardy due to crypto assets, although similar issues have plagued banks in the past.
It has been indicated that the OCC, Federal Reserve Board, and FDIC released a statement in 2022 that was wary of the risks posed by cryptocurrencies to the banking sector, and recommended for banks to proceed with care when dealing with crypto-related activities. This cautious stance may have led to a 40% increase of Bitcoin’s price in January, and it also was the reason why the Federal Reserve Board dismissed a Custodia Bank’s application for Federal Reserve System membership and then released a statement for banks to reduce their crypto-related exposures.
There were warnings in February from U.S. government sources to the crypto industry that a widespread crackdown was in the making by the Biden Administration. Although banks with positive sentiment towards crypto, such as Silvergate, Silicon Valley Bank and Metropolitan Commercial Bank went unhindered, the threat of bans loomed large. Venture capitalist Nic Carter, dubbed it as ‘Operation Choke Point 2.0’, suggesting that the SEC, Treasury Dept and Federal Reserve Board had joined forces in order to limit interactions in the crypto market between banking institutions and any other crypto related activities.
The SEC certainly took notice and began to target crypto staking offered by Kraken and BUSD along with other crypto exchanges such as Coinbase and Bittrex. Shortly after, the crypto-friendly banks that had been safe before then, such as Silvergate, Silicon Valley Bank and Signature, all folded within the course of one week.
Chairman Gensler was then asked by House Republicans about crypto asset regulations and the agency’s actions, to which he alleged that crypto was the reason behind the banking collapse. This led other renowned personalities within the crypto space such as Brian Armstrong, CZ, Elon Musk, Nic Carter, Arthur Hayes, and Cathie Wood to speak out against the SEC and other regulatory agencies, as well as a letter being written to the FDIC chairman Gruenberg alleging that the reason for the instability in the banking sector was to limit the number of services within the crypto market.
As May approaches, the US House Financial Services Committee is finally looking into the potential coordinated efforts by the US regulators to de-bank the crypto market. Meanwhile, the Federal Reserve is preparing to increase interest rates by 25 basis points, a move that could potentially lead to further financial instability, with former Federal Reserve President Robert Kaplan warning that the banking crisis is far from over.
Essentially, it can be concluded that the cryptocurrency industry needs to remain diligent as it continues its operations, with regulators and the US government presently seeking to limit ties between crypto and the banking sector. The focus should be on the root causes of banking instability and who or what is truly to blame. Regardless if crypto is at fault, the crypto market should prepare itself in order to survive and thrive in the midst of any potential ban or crackdown.
John Hughes
- 2023-05-11
Will Cryptocurrency Cause the Banking Collapse?
This article focuses on the possibility of the banking crisis happening around the world in 2021 being caused by cryptocurrency, as well as the implications of this on the crypto market.
