Crypto trading will grow more costly as banking options shrink
The ongoing extinction of banking options for crypto firms may not lead to an industry collapse. But token traders in the short term are likely to find increased costs and market inefficiencies as companies try to re-establish connections to the traditional financial system.
Digital asset firms had already this year struggled to maintain their banking relationships amid strict regulatory guidelines. Then, in less than a week, three of the banks most willing to work with the industry — Silvergate Capital (ticker: SI ), SVB Financial Group ( SIVB ) and Signature Bank ( SBNY ) — went out of business or announced they were would do it.
An immediate concern for some crypto traders was what would happen to their own cash held on platforms like the one operated by Coinbase Global (COIN), should one of their partner banks fail. As of March, Coinbase said Signature was among the banks holding customers’ cash.
To that end, Coinbase says customers have some protections.
Coinbase says it structures deposits so customers will get up to $250,000 in “passthrough” insurance from the Federal Deposit Insurance Corp. if one of the banks should fail. For deposits to be eligible for such insurance, Coinbase or other exchanges that offer it must maintain accurate ownership records that pass muster with the FDIC. There is no way for customers to know if they are secured unless a bank actually fails, experts say.
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“Prudent risk management is at the heart of our business; we regularly conduct thorough reviews of counterparty risk and maintain contingency plans,” said a Coinbase spokesperson, pointing to a Sunday evening. chirping from the company who said it’s operating “as usual.”
In addition to Signature, Coinbase says it uses JPMorgan Chase (JPM), New Jersey-based Cross River Bank and Sioux Falls, SD-based Pathward Financial (CASH).
Some stablecoin companies, such as Gemini Trust Co., which issues GUSD, also say they offer passthrough protection to some token holders.
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Instead of losing money right away, crypto traders are likely to find a return with higher costs, low liquidity and market inefficiencies as crypto companies try to reconnect with the financial system.
Over the weekend, for example, Bitcoin traded on the Gemini exchange at a consistently higher price than on other trading platforms, noted Dave Weisberger, who heads market data firm CoinRoutes.
A month ago, market makers and other traders could quickly arbitrage such a deviation. Although banks often cannot process certain types of money transfers after business hours, Silvergate and Signature each operated widely used 24/7 networks to transfer funds between their own clients, which included major crypto exchanges. But now that those networks are down, it’s harder for traders to close that gap.
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That same reliance on banks helped cause stablecoin USDC to lose its one-dollar peg over the weekend. Stablecoins try to maintain their peg by holding a similar amount of traditional assets, such as bank deposits and government bonds, in reserve. USDC issuer Circle Internet Financial sent some traders into a panic when it revealed that $3.3 billion was locked up in Silicon Valley Bank.
But just as important to de-pegging was the fact that some firms found it difficult to process conversions between USDC and regular dollars while banks were closed.
“During periods of increased activity, conversions rely on USD transfers from banks that clear during normal banking hours,” Coinbase so late Friday. The firm began processing conversions again on Monday.
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Some crypto executives spent the weekend sharing names of remaining banks with each other that were still willing to take on crypto clients.
One such bank, Cross River, took on some banking services for Circle, the company said Sunday.
Although crypto firms have talked eagerly about avoiding the banking sector, “it’s clear that there’s a co-dependency here and that the industry and the responsible innovators and others need each other,” Circle Chief Strategy Officer Dante Disparte said on the FinTech Beat podcast on Monday.
In addition to Cross River, banks still doing business with crypto firms include Western Alliance (WAL), Customers Bancorp (CUBI), JPMorgan Chase, and Bank of New York Mellon
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(BK), according to a research note published on Thursday by Needham analyst John Todaro.
The shutdowns in the past week have also increased crypto firms’ interest in finding so-called “decentralized finance” applications to move money instead of using banks, Todaro said.
But such DeFi dreams are likely to take years to fully materialize, if they ever do. For now, at least, it’s clear that crypto firms need banks more than banks need crypto.
Write to Joe Light at [email protected]
