Banks face a difficult choice over crypto
When First Citizens Bank agreed over the weekend to buy most of what’s left of Silicon Valley Bank, there was one thing it certainly didn’t want.
Although SVB, whose failure on March 10 rocked the global banking sector, was best known for serving venture capitalists and technologists, First Citizens’ purchase agreement went out of its way to exclude cryptocurrencies and crypto-backed loans from the deal.
The North Carolina lender is not alone in its aversion to digital assets. New York Community Bank, which picked up the remains of Signature, the lender that failed right after SVB, refused to touch Signature’s substantial digital banking arm. The US Federal Deposit Insurance Corporation must return $4 billion in deposits directly to these customers.
Former US Congressman Barney Frank, who sat on Signature’s board, claimed to me that banks were reacting to growing regulatory hostility towards cryptocurrencies in the wake of November’s implosion of digital exchange FTX. He even went so far as to blame concerns about crypto for what he believed to be a hasty government takeover of Signature.
“I can’t think of any other reason why the regulator in New York shut us down,” he said. “They shoot one man to discourage the others [and say] stay away from crypto.”
Boosters of bitcoin and other digital assets agree. Online chats and Twitter are abuzz with speculation about what they see as a concerted effort by the US government to ban crypto altogether. Called “operation chokepoint 2.0,” the theory includes the collapses of Signature and Silvergate, a smaller lender that also dabbled in digital assets, and a series of regulatory actions.
Regulators insist that they are only trying to ensure that banks are stable and that cryptocurrencies do not enable money laundering and other crimes. Signature’s shutdown “was not crypto-related,” the New York Department of Financial Services said. The bank lost 20 percent of its total deposits within hours of SVB’s collapse, drained of cash, and withdrawal requests continued, the FDIC said.
“We have not lost sight of the potential transformative effect that these technologies can have on our financial system,” Michael Barr, the US Federal Reserve’s deputy governor, said in a recent speech on crypto. “But the benefits of innovation can only be realized if appropriate guardrails are in place.”
However, the crypto brethren have a point: official attitudes have hardened since FTX’s collapse. They had to. In the years while US regulators engaged in endless consultations and hand-wringing, enormous risks had built up.
FTX, once valued at $40 billion, was considered the crypto industry’s responsible player. Yet it proved so lacking in basic financial controls that millions of customers’ assets were allegedly looted by its executives. The scandal and falling cryptocurrency prices undermined Silvergate: Depositors pulled out $8 billion in the fourth quarter, forcing them to sell securities at a huge loss. That led to a further run and eventually liquidation.
Now American watchdogs are cracking down. The Fed and other regulators officially warned banks in January to be wary of “fraud and fraud” and “significant security and soundness concerns” when working with crypto companies.
Enforcement cases are also coming thick and fast. US-listed crypto exchange Coinbase has been warned it could be charged with securities violations. On Monday, the Commodity Futures Trading Commission sued Binance, alleging that it illegally allows Americans to trade crypto derivatives. The watchdog claims that Binance also facilitates illegal activities. “Which came again. They are here for crime, says the chief compliance officer of some clients. (Coinbase and Binance deny the claims.)
Jeremy Allaire, CEO of stablecoin issuer Circle, which had parked $3 billion in reserves at SVB, has warned that the crackdown is driving crypto enthusiasts to “unsupervised platforms, completely opaque banking and risk exposures. . . this does not end well”.
That’s a bit exaggerated. Some banks still serve digital asset companies in limited ways. Circle has large deposits in the custodian bank BNY Mellon and a partnership with the New Jersey bank Cross River.
But no one is openly bidding to replace Signature and Silvergate as the main crypto-focused banks. The time has come for the industry to make tough choices about digital assets. Lenders like First Citizens are signaling which side they want to be on.
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