What the bank failures mean for crypto

Are you keeping up with the other two banks that both start with an “S” and failed the same week as Silicon Valley Bank?

Silvergate Bank announced on March 8 that it was closing by itself and regulators took over Signature Bank on Sunday. All three of these institutions were known to serve a specific clientele. For SVB, it was tech startups. For Silvergate and Signature, it was cryptocurrency companies.

So what does the collapse of two of the most crypto-friendly banks mean for that industry?

Marketplace’s Meghan McCarty Carino talked about it with Laura Shin, a crypto journalist and host of the “Unchained” podcast.

Below is an edited transcript of their conversation.

Laura Shin: The crypto world in general has a lot of trouble getting bank accounts. They have a lot of trouble with any relationship they may have with banks. And it seems that the message that we’re seeing from regulators, both in formal statements as well as in these various regulatory actions, is that the crypto industry should probably be cut off from the banking system. The other thing I’ve heard from people who work with a lot of crypto entrepreneurs is that a lot of them are just going to other jurisdictions, and it looks like Asia is going to pick up a lot of business because that’s where a lot of these entrepreneurs are going. It is a changing landscape.

Meghan McCarty Carino: How do you hear all of this play into arguments about decentralized finance — the idea that underpins crypto?

Shin: Many say this kind of proves the risk of centralization. The crypto community, especially many entrepreneurs, are doubling down on building the decentralized aspects of the technology or building in a decentralized way. I think many of them actually believe that all the failures of the various centralized crypto entities over the past year will ultimately be a good thing for what they want to build. I have seen the renewed conviction and I am waiting to see if they will be able to keep that promise.

McCarty Carino: When we spoke to you at the end of last year, you said that mainstream interest in crypto may wane in 2023, but that the true believers were happy to get back to basics and develop the technology that underpins these systems. Is this another cleansing fire in that landscape?

Shin: That’s basically how the crypto community sees it. So when you cover this space, there are certain phrases you’ll hear over and over again. People in the crypto space see centralized things as what they call single points of failure. So, they’re constantly trying to build things in this decentralized way where there’s not a “single point of failure” – basically building resilience into the system and building things where you don’t have to trust a particular person or entity that they want do a good job. The system is just by nature built with all the checks and balances built in and will work in a way that doesn’t cause these problems.

McCarty Carino: Big picture, how would you describe the effect the past week has had on the crypto sector?

Shin: I would say that it has definitely caused alarm for many startups, especially for those companies that trade between the two systems. However, I see that many of them are also tweeting out lists of other companies that are still open to working with crypto companies. So who knows? Maybe we’ll see more of that. One thing that is not good about it is one of the reasons why Silvergate was one of the first to fall is simply because a large percentage of the customer base was in the same industry. And so, for these banks that are now taking a lot of new accounts from different crypto companies, we have to see if their customer base becomes highly concentrated. Hopefully that won’t be the case.

Related Links: More Insights from Meghan McCarty Carino

You can read more of Laura Shin’s coverage of how these bank collapses are affecting crypto in her Unchained newsletter.

In our conversation, Shin mentioned that it looks like federal regulators — either implicitly or explicitly — are cutting crypto out of the traditional banking system. According to Reuters, New York’s financial regulator said the closure of Signature had “nothing to do with crypto.” Indeed, in recent months the bank had been working to diversify its deposits away from crypto companies.

But a lengthy breakdown in Bloomberg suggests its association with the volatile crypto industry may have been enough to scare other depositors into running for their money after the Silicon Valley Bank’s demise.

And the collapse of Silvergate and Signature also has implications for the Justice Department’s ongoing fraud investigation into FTX.

Reuters reports that former FTX customers have filed claims accusing both banks of helping FTX steal and misappropriate their money, hoping to recoup some of their losses from those banks.

That seems less likely now.