Close
The connection between banks and cryptocurrency companies has deteriorated further in 2023. Calls for self-custody crypto have been revived in the wake of previous significant events like the fall of FTX, Three Arrows Capital, and the Terra Luna disaster, which were cited as evidence that some exchanges could not be trusted. While trying to distance themselves from cryptocurrency companies, banks seem to be dealing with their own problems.
What came next was a steady decrease in banking support for crypto companies, which, along with monetary policy tightening, supported the idea that investors could turn to crypto as an alternative monetary system because they couldn’t trust the banking system.
In recent weeks, former Coinbase executive Balaji Srinivasan has been one of the narrative’s most vocal proponents.
Recently, Srinivasan forecasted on Twitter that the price of Bitcoin would rise by more than 3,000% to $1 million by June 17, 2023.
In general, however, millennials are seen as the forerunners of a “debanked” future, according to a recent Bankless study, which found that the majority of the group is optimistic about Bitcoin’s widespread acceptance in the ensuing years. The 2008 financial catastrophe had an effect on many people’s perceptions of financial organizations.
Banks, however, provide an essential connection to the paper money system. Without them, the majority of private cryptocurrency dealers would find it difficult to buy cryptocurrency and engage in decentralized financial procedures.
One example is Silvergate Bank, which on March 8, 2023, applied for voluntary bankruptcy. Using its Silvergate Exchange Network, the bank enabled dealers to swap between fiat and cryptocurrency whenever they wanted. If they and the platform they were dealing on had a bank account with Silvergate, traders could use the payment rail to convert between cryptocurrencies and cash.
However, without this essential lifeline, cryptocurrency companies would struggle to support private dealing in their early stages.
Sam Bankman-Fried, a co-founder of the unsuccessful exchange FTX, asserted that Silvergate was crucial to the survival of cryptocurrency platforms.
Before Silvergate and after Silvergate are two distinct eras in the history of a cryptocurrency company, the accused former CEO claimed on Silvergate’s website. Also including:
“It’s hard to overstate how much it revolutionized banking for blockchain companies.”
Recently, it was demonstrated that bank dependence existed even in stablecoins tied to the worth of government-issued currencies.
Stablecoins are used by investors as on-ramps and off-ramps into the crypto economy. Stablecoins make it easier for investors to purchase and trade other cryptocurrencies than fiat money. Stablecoins were supported by on- or off-chain asset holdings from their issuers. Cash and US Treasuries are common off-chain backup investments.
Following a bank run on Silicon Valley Bank, USDC creator Circle recently had to pacify investors who had cashed more than $1 billion of the stablecoin. 25% of the assets supporting USDC at SVB were owned by Circle. Only 25% of Circle’s USDC assets, which are housed in currency, were, according to a tweet from the company, kept in banks.
Circle noted that SVB was one of the company’s six financial partners. Additionally, activities were unaffected, according to the statement, which also said:
“While we await clarity on how the FDIC receivership of SVB will impact its depositors, Circle & USDC continue to operate normally.”
On March 10, 2023, at 10:50 p.m. ET, Circle reported that it was unable to take about $3.3 billion in bank assets. The transfers Circle started on Thursday had not been completed by SVB, according to the statement. Federal authorities took over the firm on the same day.
Coinbase announced that it would cease handling transfers from USDC to USD around the same time. The conversions were dependent on dollar transfers from institutions that settled during regular business hours during times of heavy transaction traffic.
While established players like Coinbase and Circle appear to find alternative banking partners fairly readily, cryptocurrency companies have lately had difficulty in this area. Stringent hiring requirements result in arduous documentation or outright rejections for these companies.
Smaller banks now conduct more thorough due diligence following the failures of Silvergate, SVB, and Signature Bank. Users have had to wait longer for authorization ever since this new strategy. The banks do not want to be singled out by American authorities for posing a systemic danger to the financial system.
Attracting deposits, however, might strengthen bank balance sheets and increase public trust in the banking system. Additionally, non-crypto native institutions benefit from serving a wider variety of business sectors. Their liquidity risk will be lower if there is a crisis in a particular sector that causes large-scale withdrawals as a result of this diverse exposure.
The CEO of FV Bank, located in Puerto Rico, recently declared that they would offer solutions to businesses that follow “strict compliance and risk requirements.”
