Crypto must be made better to be beaten, say industry leaders
While depositors will be made whole, the shock waves the industry feels are no longer from the concept of lost funds, but rather the loss of industry-friendly banks that were the pillars of the sector.
Most big brand banks wouldn’t work with a small venture fund, a tech startup or a crypto company – let alone an exchange –. But Silvergate, Silicon Valley Bank and Signature saw these as valued customers.
“We’re going to struggle with banking for a while,” William Quigley, a Tether co-founder and CEO of non-fungible token exchange WAX, told CoinDesk in an interview. Quigley, who left Tether in 2015, is disappointed with his current leadership.
“It’s not the first time in the history of Silicon Valley that a strange phenomenon has happened,” he said. “Has there ever been a rush of money into a sector, which then goes into [SVB], and get burned when the companies make salaries? That’s literally how the system works!”
Quigley says that around June 2022, someone in management should have noticed and moved to sell off the portfolio and take the losses, or bring in more deposits.
“I have been chairman of the audit committee and bank auditor. I know the conversation that happens when deposits go down at an accelerated rate and our investment portfolio gets weakened to the point where we don’t have enough money to pay off depositors, he said.
The management should have been in contact with the Fed in January, and the Fed should have put the bank into some kind of supervisory liquidation then.
The problem that will emerge from this, he says, is a lack of trust. SVB was regulated by several federal and state agencies, had a clean audit opinion, and was rated investment grade by a federally licensed rating agency, making it appear like a good bank.
“It is unfair to expect depositors to know more than all the regulators and regulated entities that have assessed the bank,” he said, pointing out that the United States cannot have a “South American” banking environment where minimal funds are held in the bank because of low institutional trust.
VC and crypto investors prefer to work with small, non-systemically important banks due to the reluctance of large banks to work with these companies due to regulatory uncertainty, he explained.
But that doesn’t mean it’s impossible.
As CoinDesk recently reported, crypto conglomerate Digital Currency Group (DCG) has had productive talks with the likes of Santander (SAN), HSBC (HSBA), Deutsche Bank and United Overseas Bank (UOB) in Singapore, as well as fintechs such as such as Revolout on introduction in its portfolio companies.
(DCG is also the parent company of CoinDesk).
DCG will have talks with large banks, but there is no guarantee that they will be realised. These banks may end up being intimidated and refusing to onboard companies orphaned by Silvergate-SVB-Signature.
For roughly the past decade, Taiwanese crypto exchange Maicoin has had an on-and-off fiat with Far Eastern International Bank, which would be categorized as a major bank by the Fed.
Alex Liu, CEO of Maicoin, told CoinDesk that there was really no magic to convincing banks to give the exchange fiat pipelines. He is also quick to highlight that the root cause of these three banks’ demise in the US is not crypto per se.
“It involves being able to come across as not a bomb-throwing radical. It helps if you can put on a suit and talk about things like investor protection, KYC, AML and so on,” he said.
It also helps to have a physical address for your headquarters, he continued. Maicoin’s headquarters are in an office tower in downtown Taipei.
“How many crypto companies refuse to do that one thing?” he asks.
One of the local competitors is in a neighboring tower block, visible from Liu’s office, but lists an address on business cards for an off-shore jurisdiction.
Liu also says that a big part of gaining banking access was respecting the idea of equivalence.
This means everything from ensuring you are compliant in any jurisdiction you operate to respecting TradFi rules which may also apply to crypto. In Taiwan, for example, trading futures or options is a licensed activity.
“We know a lot of players who said, ‘Oh, the corresponding rules don’t apply to us, because there’s nothing in the books that says they apply to us,'” Liu said. “It might make you a lot of money for a while, but at some point you’re going to get called on it.”
Will crypto’s US banking woes ricochet to Asia?
As all this is happening, many jurisdictions in Asia, from Hong Kong to Taiwan, are working to build a crypto licensing regime for retail traders.
They will definitely look to the US to see what happens, especially given the last six months which involved the collapse of FTX, and now three banks.
No regulator or legislator in the United States has come out and said outright, “hey, let’s just ban this thing,” Liu points out.
Asia regulators will take that as a cue.
“The collapse of three banks, two of which are related, will give them a lot to think about when designing the regulations,” he said. “It’s the stuff of regulatory nightmares.”