A death loop for cryptobank contagion?
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With apologies to Rudyard Kipling, when it comes to central banks and crypto, the thought was never the twain shall meet. The rise of cryptocurrencies and decentralized financial systems brought with them the sacred promise of operating outside the traditional financial system.
Yet the bankruptcy of Sam Bankman-Fried’s $32 billion crypto empire FTX — which led to the loss of billions of dollars in client funds, some of which appear to have influenced the US election and landed directly in Bankman-Fried’s pocket — blew those assurances sky high . Now the latest banking crisis is finishing the job.
The volatility of a crypto winter and rising interest rates, which combined to boost FTX late last year, went absolutely unchecked, and the ensuing contagion ravaged crypto exchanges, then financial institutions, such as Silicon Valley Bank, Silvergate Bank, and Signature Bank, all of which served the crypto community. No matter how much central banks and crypto maximalists despise each other, their links can no longer be denied or ignored.
Barney Frank, a former congressman who served on the board of New York-based Signature Bank, took the observation a step further, highlighting not just a correlation but direct causation when it came to FTX’s role in the failures. “I think if it hadn’t been for FTX and the extreme nervousness around crypto, this wouldn’t have happened,” Frank said. “It was not something that could have been foreseen by regulators.”
If true, it also means that last year’s steady stream of crypto disasters, not just FTX, likely contributed to the cumulative mess US regulators are grappling with today. But that doesn’t mean US regulators are happy to clean up. In a sign that they are not interested in saving crypto billions, the US Federal Deposit Insurance Corp. a deal for Signature’s cash deposits to be taken over by Flagstar Bank, a subsidiary of New York Community Bank, with the major exception of their $4 billion of crypto company deposits. These crypto businesses were forced to bank elsewhere.
Frank, who helped lead major regulatory reforms of the US banking system in 2008 after the global financial crisis, said he believes the move to exclude crypto companies was “to send a message to get people away from crypto.”
This strategy could backfire, driving the $1 trillion crypto industry even further offshore, making it even more difficult for regulators to police it, prevent fraud or investigate criminal activity and money laundering. Which, one could reasonably argue, is exactly the opposite of what regulators are supposed to do.
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