From March 12th to April 5th, the US Federal Deposit Insurance Corporation (FDIC) was in the process of returning a staggering $4 billion in deposits connected to failed Signature Bank’s digital asset banking business. Thus, this raises a pertinent question: What risks are behind this massive return of digital assets?
To delve into this matter, it is first important to understand the background of the chain of events leading up to this situation. After Silicon Valley Bank and Silvergate bank failed, due to their ties to digital asset companies, the FDIC closed Signature Bank, a crypto-friendly bank based in New York. Nellie Liang, Under Secretary for Domestic Finance at the US Treasury Department stated that she did not believe crypto “played a direct role” in the failure of either Silicon Valley Bank or Signature Bank. Hence, controversial allegations were made alleging that officials wanted to send an anti-crypto message, which Barney Frank, former House of Representatives member, strongly noted.
Contributed to this statement, the FDIC was reportedly asking potential rescuers of the failed banks to not support any crypto services. However, the FDIC in January clarified that it did not disallow banking organizations from providing banking services to customers of any specific class or type as permissible by law or regulation. Nevertheless, they subsequently asked banks interested in acquiring the assets of Signature to submit their bids by March 17th. Furthermore, FDIC Chair Martin Gruenberg recently stated that Signet, Signature’s payments platform, was in the process of being “marketed” to potential buyers.
Signature was financially stable until at least 2 days before it was shut, although it had lost 20% of its deposits in a matter of hours just three days prior, due to the sudden shut down of Silicon Valley Bank. Consequently, the FDIC was appointed as the receiver of the bank, and tasked with administering the funds and property connected to it.
Unpacking the situation further, there exists a myriad of other risks linked to returning $4 billion in digital asset deposits. First, there is the risk of a bank run. Also known as a run on the bank, this occurs when a large number of customers withdraw their deposits within a small window of time due to fear that the bank may fail. The term originates from the Great Depression when customers lined up in large numbers outside banks to withdraw their deposits. Hence, if the public becomes panicked that the FDIC is unable to return the digital asset deposits, a bank run is a possible risk.
Moreover, there is the risk of an unconfirmed deposit. This refers to the fact that FDIC depositors may receive a check in the mail weeks later, thus resulting in an unconfirmed deposit before they receive the funds. Last, there is the risk of depegging. Depegging, which has become a major risk to cryptocurrency markets in recent years, occurs when a cryptocurrency token’s value deviates from the value of the underlying asset or currency it was originally pegged to. In the case of stablecoins, this typically happens when the pledged fiat currency sits in an account of the stablecoin issuer, rather than being held in a multi-signature wallet.
Altogether, FDIC Chairman Martin Gruenberg’s announcement of returning $4 billion dollars in digital asset deposits understandably evokes unease and curiosity as to what risks this development brings. From bank runs to depegging, the uncertainties involved in the return of these deposits must be taken into account. As such, education is the first step that can be taken to understand and mitigate the risks, so that consumer confidence is restored and digital asset transfers can occur safely. As more banks become increasingly involved in the crypto industry, we can only hope that this example serves as a strong reminder to institutions that complete risk assessment should always be done before such dealings.
