Closed Gateway. How the crypto business will exist without banking services
The collapse of Silvergate and Signature banks left thousands of cryptocurrency companies without the ability to quickly convert digital assets into fiat funds. Talking about the current state of industry players
Most digital currencies, despite decentralization, are still heavily dependent on traditional banks. The need for ways to convert them to and from traditional money, as well as the associated risks for 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 pouring investor funds into digital assets and raise questions about the banking industry's continued engagement with the crypto world, at least within the U.S. as a central financial hub for the industry.
The United States is the capital leader with the world's leading currency. It is unlikely that cryptocurrency leadership will shift anywhere from the U.S., argues ENCRY Foundation co-founder Roman Nekrasov. In his opinion, the U.S. authorities have no goal to close the channels for converting cryptocurrencies into fiat and even more so to prohibit banks from dealing with the crypto-business. U.S. regulators primarily want to gain control over the crypto market, not ban it.
"Why ban something when you can head it off and get your own benefit? In the U.S., they want to achieve control over the so-called payment gateways in order to prevent money flows past or in a gray regulatory zone," the expert explains.
Large crypto exchanges were able to become the channel for converting real money into digital assets thanks in large part to partnerships with Silvergate and Signature banks. Both have developed their own payment services - Silvergate Exchange Network and Signet, respectively. They allowed customers of exchanges and other crypto-asset-related financial services to make real-time payments in dollars around the clock.
Dollars are gone from the crypto market. Who will replace Silvergate Bank?
The collapse of banks was not least influenced by rising interest rates, but the volatility of cryptocurrencies also played a role - the volume of deposits and the value of bank shares changed almost synchronously with the rate of bitcoin and other cryptocurrencies.
Banking regulators have long been wary of cryptocurrencies. Among the main reasons were the volatility of their exchange rate as a potential source of losses for investors, the movement of ill-gotten gains, and the lack of transparency of reserves for crypto assets on exchanges. Regulators now appear to be seeking to level out weak links in the U.S. banking system, identified including after the Silvergate and Signature episodes.
U.S. authorities have announced the launch of the Banking Sector Emergency Loan Program (BTFP) to help the industry overcome the liquidity crisis. Loans of up to one year will be provided to banks secured by securities, such as Treasury bonds. This should save banks from having to sell these securities quickly in the event of a crisis. According to the estimation of JPMorgan analysts, under this program, the US Federal Reserve System (FRS) may inject up to $2 trillion into the American banking system.
After that investors expect the inflow of additional capital to stock and cryptocurrency markets that will promote the growth of shares, cryptocurrencies, and all risky assets, Nekrasov believes. The shares of the financial sector will sag, as any collapse in the banking system will inevitably cause a chain reaction, the expert suggests.
The Fed's help to banks is estimated at up to $2 trillion. How will the crypto market react?
Since U.S. regulators apparently intend to reduce the share of banking transactions with cryptocurrencies, cryptocurrency 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 crypto-businesses and the experiments of major financial players with crypto-assets.
Implications and solutions
According to Bloomberg, amid growing distrust of the banking system, cryptocurrency firms have begun to more actively move assets to asset management companies, such as Fidelity. The company this week opened up access to its Fidelity Crypto platform to U.S. traders, allowing them to trade bitcoin and Ethereum.
According to Signature Chairman Barney Frank, there was no objective reason for the bank to close, and he called the U.S. authorities' decision to shut it down "a very strong anti-cryptocurrency signal." Bloomberg has learned that the bank faced a criminal investigation because of its cryptocurrency operations before the collapse.
U.S. regulators have chosen a "punitive approach," notes BitRiver financial analyst Vladislav Antonov. Instead of striving for legislative transparency, the authorities "intimidate the management of banks" not to get involved with cryptocurrency companies, the expert noted. Back in February the head of exchange Binance Changpeng Zhao said that, according to his information, the U.S. banks have a tacit recommendation to either avoid working with the crypto market as much as possible or to exercise maximum caution. The Silvergate and Signature examples are likely to be instructive to others.
Even if regulators do not ban U.S. banks from dealing in digital assets, the cryptocurrency world is likely to face more expensive and time-consuming transactions to and from U.S. banks, which will likely slow settlement. A similar scenario materialized in India in early 2022. Trading volume in rupees dropped after several crypto exchanges were forced to suspend deposit-taking as banks and other payment gateways stopped supporting remittances for local trading venues.
The big players, meanwhile, were quick to find partners. Circle, the issuer of the second-largest USD Coin Stablecoin (USDC), announced that it had found a new banking partner in Cross River Bank. The global cryptocurrency market is growing even as the U.S. banking industry is going through an upswing. Bitcoin rate updated its maximum of nine months on March 17, climbing above $27 thousand, other cryptocurrencies are also growing in price after the leader.
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