Crypto must look overseas as US exchanges become unbanked
Silvergate, Silicon Valley Bank and Signature. Three major crypto-friendly banks have actually shut down in one week, each for slightly different reasons. Nevertheless, the effect is the same. These collapses have sparked fears of contagion and raised questions about whether it is safe to put funds in traditional banks. On the whole, it seems that US crypto firms will struggle for homegrown banking partners for some time to come. And since the impact appears to be varied and lasting, here are some important factors to keep an eye on.
This banking crisis is not a crypto problem, but it has become one
While these collapses aren’t 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 money tied up in SVB. And international startups that have raised money from American venture capital are no exception. Without these banks, startups are already experiencing roadblocks in opening new accounts elsewhere or even finding a place to park their money. Meeting wages 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 ramps from US dollars to cryptocurrencies. They facilitated instant settlement services, enabling crypto exchanges to receive fiat currencies 24/7, outside normal business hours; a key requirement for 24/7 365 crypto markets. The collapse of these banks has thrown crypto payment rails into chaos, affecting liquidity and trading volume as a result. Non-US crypto companies are equally affected. Singapore-based exchange Crypto.com and Luxembourg-based exchange Bitstamp have discontinued their services operated via Silvergate following the bank’s announced closure. Now, US and international crypto firms are going bank to bank to find comparable services, and they’re certainly not looking in the US
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 USD 3.3 billion banked at SVB. DAI, another popular USD-pegged stablecoin, was also depegged due to its partial backing from the USDC. Both stablecoins have since regained their pegs, following the Fed’s intervention to stop the banks’ depositors and Circle’s pledge to cover deficits. Nevertheless, the recent unusual economic 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 are likely to take the lion’s share of the hit, at least reputationally.
Still, as crypto firms scramble to find alternatives to USD-denominated on/off ramps for crypto transactions – with their TradFi banking partners out of the picture – we expect institutional investors and traders to 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, are also likely to gain more market share going forward.
Navigating US banking options can become increasingly difficult
Recent events have also left an opening for traditional retail banks, which are seeking a bigger piece of the crypto pie both in the US and abroad. Silvergate alone served over 1,000 crypto businesses, meaning the fallout from three banks leaves a huge void to fill. HSBC has announced plans to buy SVB’s UK arm, and Circle is transferring assets to BNY Mellon. Other banks such as Mercury and Axos, which cater to startups, are also showing a growing interest in this area, as startups hunt 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 US regulators recently, some in the crypto industry are speculating that this is a coordinated crackdown to begin with. The next logical leap would be to also assume that any US banks trying to open accounts for crypto firms could eventually be cut off. Moreover, recent moves by regulators to freeze customer deposits with SVB also showed a lack of predictability or clarity about which banks will be bailed out and which will not. Navigating banking options in the US will become increasingly difficult for all crypto firms until there is more regulatory clarity, not to mention confidence in US banks in general.
Offshore options for capital efficiency and risk diversification
Bank is required; the banks are not. This is the philosophy held by many crypto-natives, who prefer not to trust centralized organizations such as 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. Admittedly, we have little clarity on banking options in the US at the moment, at least not until new homegrown options emerge. Nevertheless, the closure of these three banks has created an opening for banks based in Europe and Asia. We are likely to see crypto companies pivot away from the US and not just in the short term.
Still, companies with digital assets will experience short-term pain as the challenges associated with these transitions continue. For example, cross-border transactions through SWIFT bank transfers and currency conversions, as well as the banks’ onboarding process for new partners, will take time. How this situation ultimately plays out will depend on a number of factors, ranging from regulatory changes to market conditions.
In conclusion, recent events have created market turmoil and friction for US crypto exchanges as they are effectively deregulated. While it will be short-term pain for crypto firms to adapt, an opening has emerged for other players to claim a larger piece of the crypto pie both in the US and abroad. US crypto firms will likely need to start exploring offshore banking partnerships to keep capital safe and efficient until new homegrown options emerge. There is no doubt that we all have to face the challenges of changing regulations, market requirements and the prevailing conditions as the year progresses.
