The week that broke the bank for crypto

Sometimes it’s a seismic week that shakes up crypto.

Iron it out.

Seems like every week, today, is a seismic week shaking up crypto.

The ecosystem continues to evolve, but in recent days it feels like development is being dictated by flames, by crumbling business models, by looming regulations that dictate what people and companies can’t do (and less about what people can do) when it comes to using digital currencies, holding them, storing them, and whether any of it is really safe.

This time, Silvergate Capital’s crisis heralds the fact that the link between cryptocurrency and traditional banking is frayed, and may never be cemented, at least not if regulators get their way.

As we reported here, Silvergate has acknowledged that a wave of bank runs and its efforts to raise liquidity have led to concerns about its very viability. It turns out that offering traditional banking services – deposits, mortgages, lending – becomes more difficult to do when the client companies’ own wealth is dependent on volatile cryptocurrencies, which in turn are subject to the great unknown regulatory controls.

The regulatory scrutiny is increasingly heading towards Silvergate, yes, but the consequences will go far beyond the fate of the individual company.

Shot across the bow

The shot was fired over the bow earlier this year. In a joint statement in January, the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. on the risk of “significant volatility in crypto-asset markets, the effects of which include potential impacts on deposit flows associated with crypto-asset companies” and “contagion risks within the crypto-asset sector resulting from interconnections between certain crypto-asset participants, including through non-transparent lending, investment, financing, servicing and operational arrangements.” These interconnections may also pose concentration risk to banking organizations with exposure to the crypto-asset sector.”

The best way to shut down these concerns may be to “ring fence” the activities themselves. That means keeping banks away from a full embrace of crypto firms. The crypto companies themselves may sense a crackdown coming, or at least fear being able to access their holdings. Elsewhere, we noted this week that four crypto-related firms — Coinbase, Circle, Gemini and Paxos — have cut ties with Silvergate.

There are other signs that traditional banking is being restricted by regulators, this time in the area of ​​investment management.

As reported here, the Securities and Exchange Commission (SEC), through comments from Chairman Gary Gensler, said that investment advisors should be wary of cryptocurrency trading and lending platforms and predictive data analytics.

“Based on how crypto trading and lending platforms generally operate, investment advisors cannot rely on them today as qualified managers,” Gensler said in prepared remarks. “To be clear: just because a crypto trading platform claims to be a qualified custodian does not mean that it is. When these platforms fail – which we have seen time and time again – investors’ assets have often become the property of the failed company, and the investors are queuing up at the bankruptcy court.” The question continues to arise as to who can be a qualified trustee.

In the UK, banks HSBC and Nationwide Building Society announced that they are banning the purchase of cryptocurrency using credit cards for their retail customers and are tightening restrictions on debit card purchases of crypto to a daily limit of $6,000.

The promise, back in the days when bitcoin was as high as $64,000, when Dogecoin was going to the moon and SBF/FTX were acronyms for crypto’s promise to reimagine finance and banking… is suddenly long ago and far away.