Why US Fed decided to stop crypto-focused supervision of banks introduced after Silicon Valley Bank collapse

Indian Express

7 hours ago

In a fresh boost for cryptocurrency popularisation in America, the US Federal Reserve on Friday withdrew its Novel Activities Supervision Program which was unveiled in the aftermath of the collapse of cryptocurrency exchange FTX and its domino effect on three lenders — Silicon Valley Bank (SVB), Signature Bank and Silvergate Bank in 2023.
The Fed on Friday announced that it will 'sunset its novel activities supervision program and return to monitoring banks' novel activities through the normal supervisory process.'
The move follows a series of pushes from the Trump administration — from the GENIUS Act to promote stablecoins (dollar backed cryptocurrencies) to an executive order allowing the investment of 401K retirement corpus in alternative assets including crypto coins.
Bitcoin prices stood in red down over 1 per cent to $117,720.50 apiece on Saturday at 11:32 am IST. Ethereum's price was also down 4.55 per cent to $4,428.47 apiece from the previous day's close, according to data from CoinMarketCap.com. Bitcoin and Ethereum prices neared record highs on Wednesday after US Treasury Secretary Scott Bessent said in an interview to Bloomberg that the Fed should cut rates by around 50 basis points in September, since economic analysis indicates they should have been already cut by 150-175 basis points. Analysts stated that the rally in the two leading cryptocurrencies may taper off on potential profit booking by participants.
The US Fed stated it had started the novel activities supervision programme to gain knowledge of banks' crypto-related and fintech activities. 'Since the Board started its program to supervise certain crypto and fintech activities in banks, the Board has strengthened its understanding of those activities, related risks, and bank risk management practices,' it said.
The US central bank decided to scrap this specialised supervision and merge it with its 'standard supervisory process' for banks and financial institutions, the Fed added. This marks a change in stance from 2023 when the Fed in a joint statement with the US Federal Depository Insurance Corporation (FDIC) — which backstops bank deposits — said 'the agencies believe that issuing or holding as principal crypto-assets that are issued, stored, or transferred on an open, public, and/or decentralised network, or similar system is highly likely to be inconsistent with safe and sound banking practices.'
Apart from the above order, the Fed also withdrew a joint guidance with FDIC flagging risks to banks from crypto-related deposits, in which they stated that crypto-related entities and stablecoin-related reserves were vulnerable to the confidence in these assets and susceptible to rapid outflows, making them highly volatile deposits. Previous orders requiring banks to seek the Fed's permission for dealing in crypto assets and stablecoin issuance were also withdrawn on Friday.
The Fed's intervention focused on how banks deal and interact with cryptocurrencies was prompted by the collapse of the crypto exchange FTX led by Sam Bankman Fried (SBF), which triggered the collapse of three lenders, most importantly, Silicon Valley Bank. To be sure. SVB's decline was primarily guided by risky investments in short-term securities. However, along with Signature Bank and Silvergate Bank, SVB had exposure to crypto investors, which prompted the Fed's specific supervision of banks.
The FTX exchange collapse, in which SBF was accused of channelling depositors' funds to invest in the cryptocurrency Luna which was used to prop up the TerraUSD stablecoin.
Amid a mass Terra USD sell off, FTX and related entities gradually caved in owing to a loss of liquidity as well as allegations of fraud.
Signature Bank and Silvergate Bank collapsed owing to their balance sheet exposure to FTX which led to a liquidity crunch amid panicked withdrawals by customers. These lenders also faced significant market sell offs, further squeezing their liquidity sources, leading to a bank run.
SVB sold short-term Treasuries at a loss which squeezed its balance sheet amid a rise in withdrawals. It issued bonds to raise funds for meeting customer withdrawals, which triggered a spiral as spooked investors sold its stock and customers doubled down on withdrawals, leading to a bank run. SVB's practices were guided by funding requirements from the tech and crypto sector which turned to banks after funding from venture capital and private equity firms drifted up post pandemic, according to University of Washington Law Professor Anita Ramasastry.