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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.
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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 Nekrasov, co-founder of the ENCRY Foundation. In his opinion, the American authorities have no goal to close the channels for converting cryptocurrencies into fiat, and even more so to prohibit banks from dealing with crypto business. American regulators primarily want to achieve control over the crypto market, and not ban 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.
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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.
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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 growing distrust of 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.
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.
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 either to 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.
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.
At the same time, large players quickly find partners. The issuer of the second largest USD Coin (USDC) stablecoin, 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.
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