Closure of crypto banks to affect business in the US
The crypto industry may have weathered the storm, but the aftermath will be significant as it faces a banking crisis and some uncertain next steps.
So to begin with, three banks collapsed in less than a week. All three have significant connections with the crypto sector. Crypto was a favorite customer base for two of them: Silvergate and Signature. The crisis in Silicon Valley Bank (SVB), the largest of the three, has made the biggest waves. At one point it was the country’s 20th largest bank. It failed on March 10, 2023, with the holdings now managed by the Federal Deposit Insurance Corporation.
All this happened between Thursday and Monday. If you weren’t watching crypto Twitter – and you’re not much of a news junkie – you might have missed it. Lucky you.
Markets returned to a state of relative calm on Monday. But that doesn’t mean the crisis is over. Questions still hang over the future of the industry and its relationship with TradFi.
We could be looking at significant impacts due to de-banking of the sector, says Danny Talwar, Head of Tax at Koinly. “Crypto startups and exchanges will now seek alternative banking providers in the wake of these collapses. The liquidation of crypto businesses could seriously harm the sector and innovation in blockchain-based technologies.”
“The setbacks from the collapse and closure of several crypto-friendly banks such as Silvergate, SVB and Signature Bank could even set the industry back a decade. In the medium term, this will worsen with the more crypto-native collapses of the past year, resulting in an extremely difficult environment for innovation to thrive in the United States.”
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Bankageddon will have long-term consequences
According to Brian Fu, co-founder and co-project manager of zkLend, the fallout will be different depending on the size and your business. “For the larger firms that list, the impact will be delayed settlement times and difficulties in getting off and on. While for smaller firms, they may simply not be able to open a bank account to run day-to-day operations.”
To top it all off, Binance announced on Tuesday that its British pound (GBP) on-and-off ramps were suspended for new users as of March 13. It will affect all users from May 22nd, in 9 weeks. Paysafe, its fantastic banking partner, has yet to give a reason. It is unknown if it is linked to the wider implosion of banking, which has largely affected the US.
After FTX imploded in November, Signature Bank assured its customers that only a small percentage of their money was involved in the disgraceful exchange. The bank sold $8 to $10 billion worth of digital assets — and distanced itself from cryptocurrency. The sale lowered its digital assets to less than 15% of the bank’s total assets.
In December, Eric Howell, the bank’s CEO, said, “We’re not just a crypto bank, and we want that to come out loud and clear.”
Kryptobank relied on specialized payment networks
“The recent shutdown of SVB, Silvergate and Signature, three of the most crypto-friendly banks in the US, has made the US a difficult place for crypto VCs, exchanges and startups to do business,” Fu continues.
“While depositors will be made whole, their demise means that the most popular real-time payment platforms, including the Silvergate Exchange Network (SEN) and Signet, will no longer be available.”
Reports on Tuesday indicate that Signature Bank’s Signet service is still operating. But industry players are already looking for new solutions. They have a good reason to look fast and hard.
Signature Bank’s Signet Platform and Silvergate’s Exchange Network (SEN) have played a crucial role in facilitating crypto banking services for their customers. Both enabled commercial customers to pay in US dollars without transaction fees, settle payments in real time and make and receive payments 24/7.
SEN was the first to debut in 2017, while Signet was launched two years later. Since 2019, both networks have facilitated the transfer of more than $2 trillion to and from digital asset markets. The loss of these two payment networks could be the biggest short-term blow from this crisis.
Companies operating in the cryptocurrency industry may find it challenging to operate smoothly without payment networks specifically designed for cryptocurrencies. An expensive and slower automated clearing house (ACH) network can increase trading costs.
ACH transfers are slower and may incur higher fees. As a result, crypto firms — especially high-volume businesses like exchanges — prefer to use networks like Signet and SEN.
Where are the new crypto-friendly banks?
Meanwhile, the crypto-founder community is frantically looking for new banking partners. The direction of the industry has been a hot topic of speculation on Twitter. Digital Currency Group (DCG), the parent company of CoinDesk, is seeking new banking partners for portfolio companies.
According to a memo seen by CoinDesk, DCG has identified Santander, HSBC, Deutsche Bank, BankProv, Bridge Bank, Mercury, Multis and Series Financial as willing to work with crypto firms.
According to the note, certain banking services may be restricted for crypto companies. These include brokerage, money market services and the transfer of money to third parties. While traditional banks may be open to setting up accounts for crypto firms, restrictions will likely be imposed based on the extent of their cryptocurrency exposure.
Big banks are the short-term winners
The crisis in these small to medium-sized banks has caused a ripple effect across the financial industry. Funds are moving towards larger institutions for fear of wider contagion. “Bank stocks are taking a beating on fears of global contagion and a loss of confidence in the strength of regional banks that may have bond investment portfolios similar to SVB,” Fu continues.
It is impossible to know what will happen in the short term. But in the medium to long term, the way investors decide where to put their money is changing. Steven Quinn, head of research at P2P.org, believes there are relatively safer games out there. “As a risky asset that also generates real returns, Ethereum stakes are uniquely positioned to take advantage.”
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