Crypto feared being walled off from traditional finance. The banking crisis is fueling those worries.

Crypto feared being walled off from traditional finance. The banking crisis is fueling those worries.

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“If the banks are told that they cannot bank the sector, then how does the sector create diversification and bankarization?” said Dante Disparte, director of strategy at stablecoin issuer Circle. “The risk, unfortunately, was that too few banks were financing too large a sector.”

Last week’s bank turmoil is the latest setback for a cryptocurrency industry that saw much of its value wiped out following the collapse of one of the largest cryptocurrency exchanges, FTX, and the indictment of its founder, Sam Bankman- Fried.

In recent years, Silvergate and Signature, especially, had become integral parts of the digital asset ecosystem, offering both traditional banking services and fast payment networks. SVB had less exposure to the industry.

Now, with the banks closing, executives have gone wild looking for new banking partners, and some experts also speculate that regulators are trying to put them out of business.

“It’s hard to see this and not see a coordinated effort to stifle the industry,” said Ryan Selkis, chief executive of cryptocurrency research firm Messari.

However, not everyone is convinced that the banking crisis is strongly related to lenders’ ties to cryptocurrencies. Ultimately, the cause was likely a combination of poor risk management and macroeconomic problems, said Mark Williams, a former Federal Reserve bank examiner who teaches at Boston University. In particular, the Federal Reserve’s aggressive fight against inflation left some lenders strapped with dwindling deposits and deeply discounted bonds they could only sell at a loss.

“When you lose the trust of depositors,” Williams said, “even the strongest bank can’t hold out.”

A spokesman for the New York Department of Financial Services, which shut down Signature on Sunday, said the decision had “nothing to do with cryptocurrency,” adding that the bank also handled everything from food vendors to real estate. commercial.

“The bank failed to provide reliable and consistent data, creating a significant crisis of confidence in the bank’s leadership,” the spokesperson, who was granted anonymity to speak about a department decision, said in a statement. “The decision to take possession of the bank and turn it over to the FDIC was based on the current state of the bank and its ability to safely and soundly conduct business on Monday.”

The comment from the New York regulator came after former Representative Barney Frank, a Signature board member, told POLITICO on Monday that the bank run was caused by “nervousness and beyond the nervousness of [Silicon Valley Bank] and crypto.

“I think if it hadn’t been for FTX and the extreme crypto jitters, this wouldn’t have happened, even for [Silicon Valley Bank] or to us,” said the Massachusetts Democrat, who was a key architect of the new rules enacted after the 2008 crisis. “And that was not something that regulators could have anticipated.”

However, regulators are watching for any consequences of the banking industry’s problems with cryptocurrencies.

Commodity Futures Trading Commission Chairman Rostin Behnam said Wednesday he is “comfortable that we’re going to get through this without disruption to our markets” following the response from bank regulators over the weekend.

But the CFTC is watching to make sure the crypto derivatives markets it oversees “remain resilient.” [and] fraud free.” Given the close ties Silvergate and Signature had to the industry, Behnam told reporters at an industry conference in Florida that there is a chance the crypto market could struggle with liquidity and access to traditional finance.

So far, the immediate impact has been relatively muted among some of the biggest cryptocurrency players.

Coinbase, the country’s top cryptocurrency exchange by market volume, has $240 million in corporate funds locked up in Signature, according to the company. But customer funds have not been affected, Coinbase said in a tweet.

Kraken is ending its relationship with Silvergate. Both companies have said they use several different banks for client funds.

However, Circle’s USDC token, pegged to the dollar, was rocked by traders over the weekend.

The so-called disassociation came after the company revealed that it had more than $3 billion on deposit with Silicon Valley Bank. While that only represented a fraction of the Circle’s reserves, the bulk of which are held in a BlackRock-run money market fund, news of its exposure sent the token’s price plummeting below its parity. of $1. The token has since rallied. to the relief of crypto executives and backers.

USDC’s “breaking the money” injected uncertainty into crypto markets that view the token as a stable asset and a critical element of the ecosystem’s payment infrastructure.

The volatility had more to do with Silicon Valley Bank than Circle, Disparte said. The bank’s investment portfolio was hit when the Fed began raising rates to reduce inflation. Circle’s exposure to the institution presented a major threat to its token.

Disparte said he is hopeful that pro-crypto lawmakers can take advantage of the calamity surrounding the collapse of the three banks to pass stablecoin legislation, which has been in the works at House Financial Services for nearly a year.

Sam Sutton, Zachary Warmbrodt, and Victoria Guida contributed to this report.

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