What big banks eager to get into crypto can learn from small bank crypto vets

The news: Small banks that saw an opportunity in crypto are now feeling the effect, per The Wall Street Journal. There are lessons to be learned from large banks asking for a greater role in the asset class.

Role of small banks: Through the use of crypto and digital assets, small banks saw a way to carve a place for themselves in the sector and offer a service that most larger banks shied away from.

Banks like Silvergate capital, Signature bankand Customers Bancorp took on billions of dollars in deposits from crypto exchanges, investment firms and stablecoin issuances. But 2022 has been a year unlike any other.

• Silvergate Capital saw deposits swing by $5 billion in Q2. But towards the end, deposits remained stable at $13.5 billion.
• Signature Bank reported a drop in deposits for the 2nd quarter, only the second time this happened in the past 10 years. The bank encountered some problems when one of its major customers, Celsius network, filed for bankruptcy.

Driving deposit: Smaller banks often struggle to maintain healthy deposit levels as customers are lured away by larger banks’ better interest rates and other incentives. The crypto market gave small banks an alternative to increase their deposits.

• The banks do not hold crypto or digital assets. Instead, they provide corporate accounts for crypto firms, making it easier for the crypto firms to provide liquidity to clients or buy digital assets quickly.
• Big banks tend to stay away from holding deposits for crypto firms – they’d rather have stable, affordable deposits that will help them offer longer-term loans.
• Banks with deposits for crypto firms typically aren’t able to grow their loan books as quickly because they need a larger cash cushion for a potentially wild swing in deposits.

This year offers a good example of rapidly changing deposit levels. As volatility in the crypto market increased, banks saw an increase in deposits, trading slowed and investors waited to see how things would pan out. But when investors learned that their assets were not insured, they flocked to sell out of the asset class and retrieve their deposits.

The bigger picture: While smaller banks have been the main players for crypto exchanges and issuers, big banks demand for a position in the field. Earlier this month, banks petitioned the Biden administration for a greater role in the development of digital asset regulation and for permission to engage in additional crypto activities.

• The banks argue that their highly regulated sector makes it the perfect place for innovation.
• But critics fear that if big banks get wrapped up in crypto, the volatility of the asset class could bleed over into traditional markets.