Crypto just lost both of its main banks. Here's what it means for the industry going forward

Published Mon, Mar 13 20232:48 PM EDTUpdated Mon, Mar 13 20234:06 PM EDT

The two biggest banking institutions serving cryptocurrency businesses in the U.S. have shut down in the last four days. Investors have worried that the collapse of Signature Bank, whose assets were seized Sunday evening by regulators, was inevitable following the impending liquidation of Silvergate Bank and given the increasing regulatory hostility toward crypto companies. Now that event is past us and has left young U.S.-based crypto startups with few options for banking relationships. "There's kind of a black mark on crypto deposits for the next few weeks," said Conor Ryder, research analyst at Kaiko. "It could be that one of the smaller banks decides to raise their hand and take on the deposits but I don't think they'll be jumping on that opportunity after everything was done over the weekend." The biggest priorities for the industry now are around diversifying on-ramps into crypto and focusing on policymaker education. Before the end of Silvergate and Signature, the regulatory crackdown on crypto had already started. The days before the industry had crypto-forward banks to turn to were some of the darkest for the industry. The inability to form banking relationships was a big obstacle to growth. At the end of February, three major banking regulators issued a joint statement warning banks of the liquidity risks associated with banking crypto companies. In January, the Wyoming-chartered special purpose depository institution and famously unleveraged Custodia Bank set off the de-banking wave when its application to become a member institution of the Federal Reserve was denied. "Banks and law firms are getting a clear message from regulators: distance yourselves from crypto companies," said Ric Edelman, founder of the Digital Assets Council of Financial Professionals. "This is blatant bias without legal standing, and if sustained, it will harm U.S. innovation for decades to come," he said of the Signature closure. "But for the moment, crypto companies are increasingly finding themselves where cannabis companies were a decade ago." Stablecoins in focus Stablecoin regulation is set to take center stage with the industry scrambling for banking alternatives, according to various crypto market participants who are skeptical the remaining banking institutions will welcome crypto with open arms. One of the clearest paths forward is for crypto firms to transact in stablecoins. "We've seen stablecoins crypto-pairs rise to an all-time high 90% of trading volume on exchanges, up from 79% a year ago, at the expense of the dollar," Ryder said. "The industry has become less and less reliant on the U.S. dollar and crypto firms are familiar with stablecoins, so this could be a smoother transition than people expect." Stablecoins also satisfy the need for 24/7 payment rails, he added. Both Silvergate and Signature offered a service that allowed fiat money to easily flow into crypto assets. Even if another bank opened its arms to crypto companies, the industry is still feeling the loss of the Silvergate Exchange Network and Signature's Signet platform. Kaiko reported Monday that liquidity is already suffering at U.S. exchanges. Gemini's was down 74% for the month, while Coinbase's fell 50%, and liquidity at Binance.US dropped 29%. Binance, however, suffered a smaller, 13%, impact. The problem with the stablecoin route is it concentrates trust in a handful of stablecoin issuers, who would likely need to be more heavily regulated, Ryder said. Over the weekend Circle's USDC stablecoin broke its peg to the U.S. dollar, dropping below 87 cents. The frenzy came after Circle said it has about $3.3 billion in SVB. It regained its peg Monday.

Employees work at a Signature Bank branch in Manhattan on March 13, 2023 in New York City.

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