Digital asset exposure cited in GAO investigation of Signature Bank implosion
According to Michael Clements, the U.S. Government Accountability Office (GAO) is reviewing “large deposits from the digital asset space” to determine if cryptocurrency played a role in Signature Bank’s collapse.
The review underscores the increasing concerns of regulators over the potential risks posed by digital assets to the stability of the financial system.
Unsatisfactory risk-management practices
The United States GAO announced a preliminary review of the collapse of Signature Bank and Silicon Valley Bank, citing exposure to deposits from the cryptocurrency industry as a contributing factor.
The report, which was released on May 11, cited “poor governance and unsatisfactory risk-management practices” as the reasons for Signature Bank’s collapse in March.
While the report did not explicitly blame digital assets for the bank’s failure, it did highlight Signature Bank’s exposure to the crypto industry, and it’s declining liquidity in the months leading up to its collapse.
Additionally, the report mentioned that the bank’s management was unable to fully comprehend its liquidity positions in the days leading up to its failure.
Regulators and lawmakers have frequently cited the collapses of Signature Bank, Silicon Valley Bank, and Silvergate Bank as cautionary tales when discussing the potential risks of cryptocurrency.
The failures of these banks have raised concerns among policymakers regarding the stability of the financial system in the face of growing crypto adoption.
In response to these concerns, some crypto companies have sought to reassure regulators and customers that they have adequate funds to offset potential risks.
For example, BlockFi and Gemini released statements following the bank failures, claiming that they had no risk or sufficient funds to cover any potential losses.
However, recent news reports suggest that regulatory scrutiny of crypto companies is increasing. In March 2021, BlockFi received a cease and desist order from the New Jersey Bureau of Securities, which alleged that the company had violated securities laws by offering interest-bearing accounts.
In April 2021, the U.S. Securities and Exchange Commission (SEC) shared a warning to investors about the risks of crypto investments, including those offered by crypto exchanges.
The regulatory landscape for cryptocurrency is evolving rapidly, and the failures of traditional banks like Signature Bank, Silicon Valley Bank, and Silvergate Bank continue to be a focal point in discussions about the risks and benefits of crypto adoption.