Silvergate, Silicon Valley Bank and Signature. Three major crypto-friendly banks have effectively closed down in one week, each for slightly different reasons. Yet the effect is the same. These collapses have sparked fears of contagion and raised questions about whether putting funds in traditional banks is safe. On the whole, it’s looking like U.S. crypto firms will struggle for homegrown banking partners for some time to come. And as the impact looks to be varied and lasting, here are some major factors to keep an eye on.
This banking crisis is not a crypto problem, but it has become one
While these collapses are not necessarily a problem stemming from crypto itself, crypto firms were among the first to feel the pain. Along with other tech firms, many crypto startups have their funds stuck in SVB. And international startups that have raised money from U.S. venture capital are no exception. Without these banks, startups are already experiencing roadblocks with opening new accounts elsewhere or even finding a place to park their funds. Meeting payroll has also become a major short-term concern.
Furthermore, Silvergate Bank’s Silvergate Exchange Network (SEN) and Signature Bank’s Signet were crucial to crypto’s banking rails. These services provided on-ramps from U.S. dollars into cryptocurrencies. They facilitated instant settlement services, enabling crypto exchanges to get fiat currencies 24/7, outside of regular business hours; a key requirement for the 24/7 365 crypto markets. The collapse of these banks has thrown crypto payment rails into chaos, impacting liquidity and trading volumes as a result. Non-U.S. crypto companies are equally affected. The Singapore-based exchange Crypto.com and Luxembourg-based exchange Bitstamp have unwinded their services operated via Silvergate after the bank’s announced closure. Now, U.S. and international crypto firms are going bank to bank to find comparable services, and they’re certainly not looking within the U.S.
Confidence in stablecoins is shaken but not broken
The failure of these banks has also spilled over into the stablecoin market. Circle, the issuer of USDC, previously the USD-pegged stablecoin with the second-highest market cap, revealed that it had US$3.3 billion banked with SVB. DAI, another popular USD-pegged stablecoin also depegged due to its partial backing by USDC. Both stablecoins have since regained their pegs, after the Fed’s intervention to backstop the banks’ depositors and Circle’s promise of covering shortfalls. Yet the recent unusual financial conditions have nevertheless highlighted the vulnerability of stablecoins, shaking confidence and trust. Coupled with recent regulatory pressure on BUSD and its issuer Paxos, USD-pegged stablecoins will likely take the lion’s share of the hit, reputationally at least.
Yet, as crypto firms scramble to find alternatives to USD-denominated on/off-ramps for crypto transactions — with their TradFi banking partners out of action — we expect institutional investors and traders will become more reliant on stablecoins instead. For now, USD Tether (USDT) is gaining popularity as it has no exposure to the failed banks. However, non-USD pegged stablecoins, including non-USD fiat and BTC- and/or ETH-backed stablecoins, will likely also gain more market share going forward.
Navigating US banking options may be increasingly difficult
Recent events have also left an opening for traditional retail banks, who are seeking a bigger slice of the crypto pie both in the U.S. and overseas. Silvergate alone served over 1,000 crypto businesses, meaning the fallout of three banks leaves a massive void to be filled. HSBC has announced plans to acquire SVB’s U.K. arm, and Circle is moving assets over to BNY Mellon. Other banks such as Mercury and Axos, which cater to startups, are also showing a growing interest in this space, as startups scramble for new banking partners.
However, it remains to be seen whether these traditional banks can enter the crypto market without regulatory interference. Given the repeated warnings from U.S. regulators recently, some in the crypto industry are speculating that this is all a coordinated crackdown to begin with. The next logical jump would be to also assume any U.S. banks trying to open accounts for crypto firms may be cut off eventually. Moreover, recent moves by regulators to backstop customers’ deposits at SVB also showed a lack of predictability or clarity on which banks will get rescued, and which won’t. Navigating banking options in the U.S. will be increasingly difficult for any crypto firms until there is more regulatory clarity, not to mention confidence in U.S. banks in general.
Offshore options for capital efficiency and diversifying risks
Banking is necessary; banks are not. This is the philosophy held by many crypto natives, preferring not to rely on centralized organizations like banks and traditional institutions. But the unpopular reality is that crypto firms need TradFi to bridge the on/off-ramps from fiat to digital currencies. The reliability of this banking service is what enables the smooth operation of our platforms. True, we have little clarity on banking options within the U.S. at the moment, at least not until new homegrown alternatives emerge. Yet the closure of these three banks has left an opening for banks based in Europe and Asia. We are likely to see crypto companies pivoting away from the U.S. and not just for the short term.
Nevertheless, digital asset companies will experience short-term pain as the challenges relating to these transitions remain ongoing. For example, cross-border transactions through SWIFT wire transfers and foreign currency conversions, as well as banks’ onboarding process for new partners, will all take time. How this situation ultimately turns out will depend on a variety of factors, ranging from regulatory changes to market conditions.
In closing, recent events have created market turmoil and friction for crypto exchanges in the U.S. as they become effectively unbanked. While there will be short-term pain for crypto firms to adapt, an opening has emerged for other players to claim a bigger slice of the crypto pie both in the U.S. and overseas. Crypto firms in the U.S. will likely need to start exploring banking partnerships offshore to keep their capital safe and efficient until new homegrown options emerge. No doubt we will all need to rise up to the challenges around changing regulations, market demands and the prevailing conditions as the year progresses.