What happened to the crypto-friendly banks in March 2023?

Silvergate: a voluntary wind-down

From about 2014 to March 2023, Silvergate Bank focused on companies that bought and sold crypto, the Federal Reserve said.⁷ On 3 March 2023 it announced it was shutting the SEN, its 24/7 dollar network for crypto firms.¹

On 8 March 2023, its holding company announced it would wind down the bank and liquidate it voluntarily. It said "recent industry and regulatory developments" made this the best path, and that the plan included full repayment of all deposits.¹

In November 2023, Silvergate said every depositor had been fully repaid, apart from tiny amounts totalling less than $10,000, without risk to the deposit insurance fund.⁸ The Federal Reserve confirmed in July 2024 that Silvergate had paid back all deposits.⁹

Also in July 2024, the Federal Reserve fined Silvergate $43 million for what it called deficiencies in how Silvergate monitored transactions under anti-money-laundering law. With California's penalty, the total was $63 million. The US Securities and Exchange Commission separately announced a penalty against Silvergate Capital Corporation, the bank's holding company.⁹ Silvergate agreed to the order without admitting or denying the Fed's allegations.⁷

Silicon Valley Bank

Silicon Valley Bank (SVB) was a traditional bank, as a Federal Reserve staff note puts it.¹⁰ Its customers were concentrated in technology and life sciences, many of them start-ups backed by venture capital.⁴ On 9 March 2023, depositors pulled out more than $40 billion, and its managers expected $100 billion more the next day.⁴ On 10 March, California's banking regulator closed it and appointed the FDIC as receiver.²

The Federal Reserve's own review, published in April 2023 with a letter from its Vice Chair for Supervision, Michael Barr, gave these findings:⁴

• SVB's board and management failed to manage their risks.⁴
• SVB had weak management, a highly concentrated business model and a reliance on uninsured deposits.⁴
• About 94% of its deposits were uninsured at the end of 2022.⁴
• Supervisors did not fully appreciate how vulnerable it was as it grew.⁴

The review also said Silvergate's announcement on 8 March further affected depositors' mood.⁴

Signature Bank

Signature Bank in New York had grown fast, in part on deposits from crypto firms.⁵ At the end of 2021, crypto-related deposits were 27% of its total deposits.⁵ On 10 March 2023 it lost $18.6 billion of deposits in a matter of hours, a fifth of its deposit base.⁶ On 12 March, New York's Department of Financial Services closed it and appointed the FDIC as receiver.³

Two reviews came out on 28 April 2023:^5,6

• The FDIC said the primary cause was illiquidity, meaning it ran short of cash to pay depositors, after contagion from Silvergate and SVB. But it said the root cause was poor management.⁵
• The FDIC said Signature failed to understand the risk of relying on crypto industry deposits.⁵
• New York's regulator found that crypto customers' withdrawals on 10 March were roughly in line with their share of deposits. The bigger issue, it said, was a high concentration of uninsured deposits.⁶
• The FDIC also said it could have escalated its own supervisory actions sooner.⁵

Every depositor protected, this time

On 12 March 2023, the Treasury, the Federal Reserve and the FDIC announced a "systemic risk exception" for both SVB and Signature.¹¹ All depositors, insured or not, would get all their money, and taxpayers would bear no losses.^11,12 Shareholders and some lenders to the banks were not protected.¹² Any losses to the deposit insurance fund would be recovered from banks through a special charge.¹¹

When another bank bought most of Signature's deposits a week later, its bid left out about $4 billion of deposits linked to Signature's crypto banking business. The FDIC said it would pay those deposits directly to the customers.¹³ In March 2023 the FDIC estimated Signature's failure would cost its insurance fund about $2.5 billion, and said the exact cost would be known only when the receivership ends.¹³

A stablecoin caught in the run

Circle, the issuer of the USDC stablecoin, could not withdraw $3.3 billion of reserves held at SVB, about 8% of USDC's reserves.¹⁰ Holders rushed to redeem, and at its lowest point USDC traded at 86 cents to the dollar, a Federal Reserve staff note found.¹⁰ It recovered after the 12 March announcement, and fully once Circle resumed redemptions on 13 March.¹⁰ Circle said the $3.3 billion was made fully available that day.¹⁴

Why uninsured deposits run

The FDIC's standard insurance limit is $250,000 per depositor, per insured bank, for each account ownership category.¹⁵ Money above that is uninsured. New York's regulator explained the risk: uninsured depositors may pull their money quickly if there is any risk their bank may fail, because they may not get it all back.⁶ The FDIC's report put it the same way: uninsured deposits are more likely to run off fast under stress.⁵