Could Silicon Valley Bank Contagion Spread to the Crypto Industry?

Silicon Valley Bank failed on Friday. Justin Sullivan—Getty Images

The crypto industry was still recovering from Wednesday’s voluntary liquidation of its bank of choice, Silvergate, when the next domino fell. On Thursday, startups and venture capitalists began fleeing Silicon Valley Bank in droves as its share price plummeted. On Friday, the Federal Deposit Insurance Corporation had placed SVB into receivership, marking the bank’s official failure.

Amid Silvergate’s descent, many crypto companies had moved their money to Signature Bank, but even that appeared shaky on Friday as shares fell more than 20% and trading was halted. Although many onlookers were concerned about Silicon Valley Bank’s potential contagion affecting the crypto industry, financial experts said it was unlikely.

Austin Campbell, adjunct professor at Columbia Business School and managing partner at blockchain-focused Zero Knowledge Consulting, said the current run of bank failures is more related to structural issues than liquidity risks like crypto.

Silvergate had built its business around the crypto industry, with roughly 90% of its deposits coming from digital asset companies. With the collapse of client FTX and the worsening bear market, customers began withdrawing deposits in droves. After the Federal Home Loan Bank called back its $4.3 billion in assistance, Silvergate was forced to sell securities that had not yet matured, including bonds and Treasuries, at a loss, compounded by the Federal Reserve raising interest rates.

“In a normal world, this is not a problem because as long as your deposits don’t leave and you’re not a forced seller, you’re just waiting for things to mature,” Campbell said. “The way it becomes a problem for the banks is when all the deposits leave.”

Because Silvergate had a concentrated deposit base of crypto companies, it suffered from the combination of an exodus of customers from a single industry combined with suddenly devalued holdings. Silicon Valley Bank, which mainly served tech startups and venture capital, faced a similar problem, which led to its rapid failure.

What’s next for Signature?

With all eyes on Signature, Campbell said the bank is less likely to have the same structural weakness thanks to a more diversified deposit base. Although the shares are falling, Campbell said it may even be in a stronger position thanks to the recent influx of deposits from Silvergate.

John Popeo, a former attorney at the FDIC, analyst at the Federal Reserve Bank of Boston, and current partner at the Gallatin Group, warned that Signature could still be vulnerable, especially as more crypto companies rush in due to the lack of other options. In December, Signature announced that it would be shrinking crypto-related deposits, with its CEO announcing that it was not just a crypto bank. The new flood of clients could be a reversal.

“It’s an unfortunate consequence of being one of the few institutions willing to bankroll a particular industry,” he said Fortune.

Still, Popeo said the growing string of bank failures is more of an industry problem than a crypto problem, pointing to how energy-exposed banks failed during the savings and loan crisis of the 1980s and 1990s.

“It is the same story that has been told once before, where a bank fails to diversify its sources of funding and liquidity,” he said. “There are consequences to be paid, unfortunately, in an environment of less security.”

Joseph Silvia, a former adviser to the Federal Reserve Bank of Chicago and Dickinson Wright partner, echoed that sentiment, arguing that the fundamentals of the Silicon Valley Bank failure do not indicate broader contagion but have more to do with how it invested its deposits.

As of now, the crypto firm with the most exposure to Silicon Valley Bank appears to be Circle, which placed an undisclosed amount of its reserves with the California-based bank. A spokesperson did not immediately respond to a request for comment Fortune.