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Daily Briefing: The Banking Crisis and Crypto Companies

3 Apr 2023

At a glance

From Silicon Valley Bank (SVB), Silvergate, Signature Bank in the US to Credit Suisse in Switzerland, the banking crisis in recent weeks has led to the collapse and acquisition of multiple banks. This has implications far beyond traditional finance. The crypto industry, for example, is losing some of its key banks, used commonly to convert between fiat currencies like the US Dollar and crypto-assets. As a result, the business models of various crypto companies are at risk.

What is happening with the banking crisis and crypto-assets

In recent weeks, news of a spreading banking crisis and the collapse of various banks, such as SVB, Silvergate, and Signature Bank, shook the world. Despite the US federal government announcing the backing of uninsured SVB deposits - thereby saving various companies and especially start-ups from financial ruin - the crypto sector is profoundly impacted.

The US crypto industry lost two critical pillars in just one week. First, crypto-friendly Silvergate Bank closed on the 8th of March, 2023. Next, Signature Bank followed suit on the 12th of March, announcing its bankruptcy.

The bankruptcy of these two banks is a blow to the crypto sector seeing that they are central bridges between the fiat (currency) and crypto (asset/currency) systems. In other words, it impacts the convertibility of some crypto assets into cash.

“The crypto industry has basically been removed from the banking sector, especially for fast 24/7 payments”, economics professor Austin Campbell told Bloomberg. In particular, 1,600 crypto companies relied on Silvergate for fast crypto exchanges into US Dollars. Signature said it already had more than 800 crypto customers in 2021, including, most recently, Coinbase, Paxos, and Circle.

In the fourth quarter of 2022 alone, crypto transaction trading volume totalled $275 billion, compared to Silvergate with $117 billion. Both of which were processed via a private blockchain, Signet.

What is in it for you?

Firstly, what is Signet, and why does it matter to you? Signet allowed for the rapid transfer of crypto into fiat, 24/7. Companies had to go through an investigative process for access to the system as it was supposed to keep out dubious customers.

Regardless, this did not quite work. Users of Signet included the collapsed crypto exchange FTX and its hedge fund Alameda Research, as well as Justin Sun's critically disliked stablecoin True USD. According to Dirty Bubble Media, further monitoring of the activities could have been improved after review.

Let us move on to the implications of Silvergate’s and Signet’s collapse and what this means for the (US) crypto sector. Without these ‘fiat gateways’, the business model of many companies is in jeopardy. Both handled a “lion’s share of fiat settlement of Bitcoin transactions” in the U.S., TBD’s CEO at Block, Mike Brock, said in a post on the social media app Damus.

According to the research firm Kaiko, transaction volumes between Bitcoin and the US Dollar and (supposedly) stablecoin Tether already fell as much as 45% on some US crypto exchanges this month. Signature’s crash is likely to exacerbate the problem.

For our readers in the US who are active in the crypto space, this might soon imply difficulties with exchanging crypto-assets and US Dollars. And, problematically, there is little improvement in sight. US regulators have explicitly and repeatedly warned traditional banks not to do business with crypto firms. Crypto proponents have argued that this attempts to isolate the industry from the traditional financial sector.

What happens next?

“These warnings make it difficult for the largest banks to serve the crypto industry. The opportunity is not worth the regulatory risk”, analyst Jaret Seiberg told CNBC, adding that this leads to a consolidation of crypto exposure to a handful of smaller banks, which means higher liquidity risk and higher concentration risk.

In turn, this creates the very risks that bank regulators are trying to combat. Critics call the US authorities’ actions, Operation Choke Point 2.0 - a deliberate government strategy to slowly dry up the crypto sector - much like the gambling and porn industries once were.

According to economics professor Austin Campbell, the most viable solution now is a move to “other jurisdictions”. For example, a new haven for the industry is emerging in Hong Kong, which is opening up to crypto with new laws. Another silver lining for crypto-positive readers is that the crypto exchange Kraken plans to start building its own crypto bank in Wyoming.

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