How Crypto Business Will Exist Without Banking Services

The collapse of the Silvergate and Signature banks left thousands of crypto companies unable to quickly convert digital assets to fiat. We talk about the current situation of industry participants

Most digital currencies, despite decentralization, are still heavily dependent on traditional banks. The need for ways to convert them into traditional money and vice versa, as well as the attendant risks for the participants in this process, became apparent when two crypto-business-friendly banks, Silvergate and Signature, collapsed in the United States.

Events of this magnitude complicate the process of injecting investor funds into digital assets and raise the question of further interaction between the banking sector and the crypto world, at least within the United States as the central financial hub for the industry.

“Get Control”

The United States is a capital leader with the world’s leading currency. It is unlikely that the leadership in the field of cryptocurrencies will shift anywhere from the United States, says Roman , co-founder of the ENCRY Foundation. In his opinion, the American authorities do not have a goal to close the channels for converting cryptocurrencies into fiat, and even more so to prohibit banks from dealing with crypto business. American regulators, first of all, want to achieve control over the crypto market, and not to prohibit it.

“Why ban something if you can lead it and get your own benefit? In the US, they want to gain control over the so-called payment gateways in order to prevent money flows from passing by or in the gray regulatory zone, ”explains the expert.

Large crypto exchanges were able to become the very channel for converting real money into digital assets, largely thanks to partnerships with Silvergate and Signature banks. Both have developed their own payment services – Silvergate Exchange Network and Signet, respectively. They allowed clients of exchanges and other financial services related to crypto assets to make payments in dollars in real time around the clock.

The American Silvergate created an image of a bank loyal to the crypto business, and this was probably the main reason for its problems. The bank’s reputation was hit by the fact of its work with the bankrupt FTX exchange and the Alameda Research fund associated with it, and the fall of the crypto market was reflected in capitalization – over the past six months, its shares have fallen by almost 95%.

The bank made a loss of $949 million in 2022. On March 1, Silvergate announced that it would delay filing its annual financial report with the US Securities and Exchange Commission (SEC) for two weeks as it is forced to reassess its ability to continue operations, and the amount of its losses from last year could still increase. After the bank postponed the report to the SEC, major players in the crypto business announced the termination of work with it. Among them are Coinbase, Gemini and Crypto.com exchanges, Paxos and Circle stablecoin issuers, and Galaxy Digital.

The collapse of banks was not least influenced by the increase in interest rates, but the volatility of cryptocurrencies also played a role – the volume of deposits and the value of banks’ shares almost synchronously changed with the exchange rate of bitcoin and other cryptocurrencies.

Chain Reaction

Banking regulators have long been wary of cryptocurrencies. Among the main reasons are the instability of their exchange rate as a potential source of losses for investors, the movement of illegally acquired income and the opacity of reserves for crypto assets on exchanges. Now, regulators seem to be looking to mitigate the weak links in the US banking system, which have been identified, among other things, after the Silvergate and Signature episodes.

The US authorities announced the launch of the Banking Sector Emergency Facility (BTFP) to help the industry overcome the liquidity crisis. Loans for up to one year will be provided to banks secured by securities such as treasury bonds. This should relieve banks of the need to quickly sell these securities in the event of a crisis. According to JPMorgan analysts, under this program, the US Federal Reserve System (FRS) can inject up to $2 trillion into the American banking system.

After that, investors expect an influx of additional capital into the stock and cryptocurrency markets, which will contribute to the growth of stocks, cryptocurrencies and all risky assets, Nekrasov believes. Only the shares of the financial sector will sink, since any collapse in the banking system will inevitably lead to a chain reaction, the expert suggests.

Following the collapse of Silvergate, Silicon Valley Bank and Signature in early March, the US authorities announced the launch of the Banking Sector Emergency Loan Program (BTFP) to help the industry overcome the liquidity crunch. Loans for up to one year will be provided to banks and other depository institutions secured by securities such as treasury bonds. This should relieve banks of the need to quickly sell these securities in the event of a crisis.

According to JPMorgan analysts, the US Federal Reserve System (FRS) can inject up to $2 trillion into the American banking system under this program, Bloomberg reported . $2 trillion is the nominal amount of bonds held by US banks outside the top five, strategists say. The largest players are unlikely to need these loans, according to JPMorgan.

With U.S. regulators apparently intent on reducing the share of crypto banking, crypto companies have already started looking for alternative banking partners in Switzerland or the UAE. It remains to be seen how the situation will affect the volume of investments in the crypto business and the experiments of large financial players with crypto assets.

Consequences and Decisions

Amid rising distrust in the banking system, crypto firms have begun to actively transfer assets to management companies, such as Fidelity, according to Bloomberg . The company this week opened up access to its Fidelity Crypto platform for US traders, allowing them to trade Bitcoin and Ethereum.

In the wake of the recent failure of numerous crypto-friendly US banks, an increasing number of businesses in the digital asset sector are contacting asset managers like Fidelity Investments to invest their funds in goods like Treasuries.

Co-founder and CEO of cryptocurrency firm Astaria Justin Bram said he was taken aback by the volume of responses he got after offering to make introduction calls to Boston-based Fidelity in a closed Telegram group conversation last week.

According to Signature Board Chairman Barney Frank, there was no objective reason for closing the bank, and he called the decision of the US authorities to liquidate it “a very strong anti-cryptocurrency signal.” Bloomberg learned that the bank faced criminal investigation before the collapse because of its cryptocurrency operations .

Barney Frank stated that the financial position of the bank, in the opinion of management, had stabilized on March 12; but despite this, the top managers of Signature were urgently fired, and the bank was closed for no “real reason”

Signature Bank board member and former US Congressman Barney Frank cited a signal for the crypto market from the US authorities as one of the reasons for the bank’s closure, CNBC reports . Regulators announced late on Sunday, March 12, that Signature is coming under their control to protect depositors and the stability of the US financial system.

Signature Bank faced criminal investigation before closing, Bloomberg reports citing its sources. The U.S. Attorney’s Office, the U.S. Department of Justice, and the U.S. Securities and Exchange Commission (SEC) have been looking into his work with crypto clients.

The authorities were interested in whether the bank was taking sufficient steps to detect potential money laundering by customers – for example, whether it carefully checked people who open accounts and whether transactions were monitored for signs of criminality, the sources told the publication.

US regulators have chosen a “punitive approach,” notes Vladislav Antonov, a financial analyst at BitRiver. Instead of striving for the transparency of legislation, the authorities “intimidate bank management” so that they do not contact companies working with cryptocurrency, the expert notes. Back in February, the head of the Binance exchange, Changpeng Zhao, said that, according to his information, American banks have an unspoken recommendation to either avoid working with the crypto market as much as possible, or to exercise maximum caution. The examples of Silvergate and Signature are likely to be indicative for others.

The US authorities began the year with pressure on the crypto business at such a pace that industry leaders fear being squeezed out of one of the largest markets.

Since the beginning of the year, US regulators, primarily the Securities and Exchange Commission (SEC), have filed several lawsuits against some of the leading players in the crypto market or issuers of their assets. At the same time, banks that provide accounts and payment processing services for cryptocurrency platforms have also been hit.

The Genesis trading group and the Gemini exchange were the first to feel the pressure of regulators this year. They were  accused  of failing to register the general crypto asset lending scheme and the Gemini Earn user income accrual program as activities falling under securities law.

Even if regulators do not ban US banks from dealing with digital assets, the crypto world is likely to face more costly and time-consuming transactions to transfer funds to and from US banks, which will likely slow down settlements. A similar scenario materialized in India in early 2022. Rupee trading volume fell after several crypto exchanges were forced to suspend accepting deposits as banks and other payment gateways stopped supporting remittances for local marketplaces.

Reuters, NEW DELHI, April 13 – Users have renewed their calls for regulatory clarity after the major Indian cryptocurrency exchanges CoinSwitch Kuber and WazirX banned rupee deposits for the purchase of cryptocurrencies through a frequently utilized state-backed transfer network.

With a prohibition supported by the central bank due to dangers to financial stability, India has been working on a bill to regulate or ban cryptocurrencies for years. Nevertheless, a recent move to tax cryptocurrency income implies that authorities have come to accept them.

At the same time, large players quickly find partners. The issuer of the second-largest stablecoin USD Coin (USDC), Circle, has announced that it has found a new banking partner in Cross River Bank. The global crypto market is growing even against the backdrop of what is happening in the US banking sector. The bitcoin rate on March 17 updated its maximum for nine months, rising above $27 thousand, other cryptocurrencies are also growing in price following the leader.