Banks shrink crypto custody by 66% in 2022, BIS study shows

Banks around the world have reduced their cryptocurrency assets in custody to 1.0 billion euros ($1.06 billion) in 2022 from 3.0 billion euros in 2021, according to a recent study by the Bank for International Settlements.

The decline of around 66% in the banks’ crypto custody over the past year coincided with a market crash stemming from a series of high-profile failures, ranging from the collapse of the Terra blockchain (LUNC-USD) (UST-USD) in May to crypto exchange FTXs (FTT-USD) implosion in November. Bitcoin (BTC-USD), the largest token by market cap, plunged around 65% for the year, marking its worst decline this year since plunging ~75% in 2018.

In addition, the Basel Committee on Banking Supervision, the primary global standard setter for banking rules, approved new regulations late last year that require a bank’s exposure to a certain crypto to be limited to 2%. The BIS cited this move as another reason for the drop in depository institutions’ crypto holdings, even though the proposed rules don’t come into effect until early 2025.

When taking into account the participating banks in addition to those that did not report crypto custody exposures (but joined the broader Basel III monitoring exercise), the total exposure was 0.001% versus 0.005% for those that did report only. It is clear that banks have marginal exposure to crypto, which makes sense as many regulators raised concerns about financial stability risks surrounding crypto banking.

Still, banks’ total sound crypto exposures, including synthetic or derivative exposures, climbed 30% Y/Y to EUR 2.9 billion, given “increased underlying crypto-active activity,” the study found. The underlying assets of the reported crypto exposures were primarily bitcoin (BTC-USD), 43%, Coinbase (NASDAQ:COIN) stock, 29%, and ethereum (ETH-USD), 4%.

Silvergate Capital (NYSE:SI) took the spotlight in recent days as the crypto-friendly bank faces an exodus of institutional clients, including Coinbase Global ( COIN ) and Galaxy Digital ( OTCPK: BRPHF ), after noting it will delay filing its annual report and revealing doubts about its viability . The latest blow to the industry was reflected in the price of bitcoin (BTC-USD) falling 4.7% to $22.36K as of Friday afternoon.

Amid the prolonged market turmoil, Signature Bank (NASDAQ:SBNY) have worked to limit exposure to digital currency deposits to less than 20% of total deposits. In its recently released mid-Q1 financial update, the lender said spot deposit balances fell by around $826M due to notable crypto deposit outflows of $1.51B.

Other banks that have made inroads into the decentralized finance (DeFi) space include: Goldman Sachs (NYSE:GS), SVB Financial (NASDAQ: SIVB), Customers Bancorp (NYSE: CUBI), Metropolitan Bank (NYSE:MCB), Bank of New York Mellon (NYSE:BK), BNP Paribas (OTCQX:BNPQF) (OTCQX:BNPQY) and Leumi (OTCPK:BLMIF).

Earlier (March 3), two of the biggest crypto advocates in Congress pushed back against the SEC’s policy on crypto accounting.