Crypto could be enjoying some boost in price and adoption as the latest report from the Federal Deposit Insurance Corp. showed that deposits of about half a trillion dollars were removed from U.S. banks during the first three months of 2023, sending stocks tumbling.
The research appeared to revive concerns about the failures of Silicon Valley Bank, Signature Bank, and First Republic, which were precipitated in large part by the aggressive interest rate hikes implemented by the U.S. Federal Reserve.
On Wednesday, the 10 largest U.S. banks by market capitalization had their stock prices fall by at least 1 percentage point.
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Unprecedented $472 Billion Bank Accounts Pulled Out
In the most recent quarter, depositors withdrew a record $472 billion, the fourth consecutive quarter of declining deposit totals, and the highest quarterly withdrawal total since the FDIC began recording the statistics in 1984.
Silicon Valley Bank (SVB) was a crypto industry savior with over $200 billion in assets. It was notable for being one of the few US-based financial institutions to provide services to cryptocurrency businesses.
Signature Bank’s Signet payment system enabled constant, instantaneous crypto-to-crypto currency transfers for businesses. Signet is an essential component of the functioning of many major exchanges, including Coinbase.
Financial filings and other records proved that First Republic’s exposure to cryptocurrencies was negligible at best.
Stocks Drop Amid Withdrawals
The FDIC claims that the “main driver” of deposit flight was the flight to safety of accounts in excess of the $250,000 level guaranteed by the insurer. For instance, when people diversified their holdings during the quarter, the total amount of insured deposits held by banks rose.
The S&P 500 bank index dropped 2.6% after the report was released, reaching its lowest position in almost two weeks and on track for its largest one-day percentage decrease since early May. Comerica, Keycorp, and Citizens Financial saw the most percentage drops.
Even while the industry is “resilient,” FDIC Chairman Martin Gruenberg said the entire impact of the turbulence might not be visible until the agency releases its results for the second quarter.
Gruenberg added that inflation, rising rates, and economic pressure continue to pose threats to the industry, especially in areas like commercial real estate.
BTCUSD inches back up to the $26K floor. Chart: TradingView.com
How Crypto Benefits From Massive Bank Withdrawals
Large-scale bank withdrawals in the U.S. can help cryptocurrencies in a few different ways.
To begin, some of the removed money may be put in digital assets like Bitcoin, which could enhance demand for these currencies. This increase in interest may cause the value of cryptocurrencies to rise.
Second, the diversification of the financial system fostered by the flow of funds into cryptocurrencies reduces the need for central banks.
Financial transactions are more private, secure, and under your control with this decentralization. By obviating the need for middlemen, it also has the potential to reduce transaction costs and shorten settlement times.
Overall, large-scale withdrawals from U.S. financial institutions can boost cryptocurrency visibility, popular acceptance, and development.
The real effect, however, will rely on a number of variables, such as the number of withdrawals, the market’s mood, the regulatory climate, and the state of the cryptocurrency market as a whole.
-Featured image from iStock