The ongoing extinction of banking options for crypto companies may not cause the collapse of the industry. But token traders in the short term are likely to find increased costs and market inefficiencies as companies try to re-establish connections with the traditional financial system.
Digital-assets companies have already struggled this year to maintain their banking relationships amid tighter regulatory guidance. Then, in less than a week, three of the industry’s most willing banks—Silvergate Capital (ticker: SI), SVB Financial Group (SIVB), and Signature Bank (SBNY)—went out of business or announced they were will do that.
An immediate concern for some crypto traders is what will happen to their own money held on platforms such as those operated by Coinbase Global (COIN), if one of its partner banks fails. In March, Coinbase said Signature was one of the banks holding customers’ cash.
To that end, Coinbase says customers have some protections.
Coinbase says it is building deposits so customers can get $250,000 of “passthrough” insurance from the Federal Deposit Insurance Corp. if one of the banks fails. For deposits to be eligible for such insurance, Coinbase or other exchanges that offer it must keep accurate ownership records forwarded to the FDIC. There is no way for customers to know for sure they are protected unless a bank actually fails, experts say.
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“Smart risk management is at the core of our business; We regularly conduct thorough reviews of counterparty risks and maintain contingency plans,” said a Coinbase spokesperson, who pointed out a Sunday evening tweet from the company saying it is operating “as usual.”
In addition to Signature, Coinbase says it uses JPMorgan Chase (JPM), New Jersey-based Cross River Bank, and Sioux Falls, SD-based Pathward Financial (CASH).
Other stablecoin companies, such as Gemini Trust Co., which issues GUSD, also say they offer passthrough protection to some token holders.
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Instead of losing any money in an explosion, crypto traders are likely to find a return to higher costs, lower liquidity, and market inefficiency as crypto companies try to to reconnect with the financial system.
At the end of the week, for example, Bitcoin traded on the Gemini exchange at a consistently higher price than on other trading platforms, THE audience Dave Weisberger, who heads the market-data firm CoinRoutes.
A month ago, market makers and other traders could easily settle such a difference. Although banks often cannot process certain types of money transfers outside of business hours, Silvergate and Signature each run widely used 24/7 networks to transfer funds between their own customers, which include major crypto exchanges. But now that the networks are gone, it’s harder for entrepreneurs to close the gap.
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The same confidence in banks helped cause the stablecoin USDC to lose its one-dollar peg at the end of the week. Stablecoins try to maintain their peg by holding an equivalent amount of traditional assets, such as bank deposits and Treasuries, in reserve. USDC issuer Circle Internet Financial shocked some traders when it disclosed that $3.3 billion was locked up in Silicon Valley Bank.
But just as important as de-pegging is the fact that some companies find it difficult to process conversions between USDC and regular dollars while banks are closed.
“During periods of heightened activity, conversions rely on USD transfers from banks that clear during normal banking hours,” Coinbase SAYS late Friday. The company started processing conversions again on Monday.
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Some crypto executives spent the weekend sharing with each other the names of the remaining banks that are still willing to take on crypto clients.
One such bank, Cross River, has taken over some banking services for Circle, the company said on Sunday.
Although crypto companies are excited about avoiding the banking sector, “what is clear is that there is a co-dependency here and that the industry and the responsible innovators and others need each other ,” said Circle Chief Strategy Officer Dante Disparte on the FinTech Beat podcast on Monday.
In addition to Cross River, banks that still do business with crypto firms include Western Alliance (WAL), Customers Bancorp (CUBI), JPMorgan Chase, and Bank of New York Mellon.
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(BK), according to a research note published on Thursday by Needham analyst John Todaro.
Last week’s shutdowns also increased interest among crypto companies in finding so-called “decentralized finance” applications to move money around rather than using banks, Todaro said.
But such DeFi dreams are likely to take years to fully materialize, if at all. For now at least, it is clear that crypto companies need banks more than crypto banks need them.
Write to Joe Light at joe.light@barrons.com
