The De-Banking of Crypto and its Implications for Bitcoin and the Industry

The cryptocurrency sector aimed to eliminate banks worldwide. Instead, it was itself de-banked.

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Regulators' Sunday decision to close Signature Bank (ticker: SBNY) essentially eliminated one of the few remaining simple ways for cryptocurrency companies to maintain a connection to the conventional financial system. It soon followed the demise of Silicon Valley Bank (SIVB), which specialized to begin including companies dealing in digital assets, and Silvergate Capital SI +1.15% (SI), which was supportive of cryptocurrencies.

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In less than a week, cryptocurrency's financial rails have essentially been shut off, claimed Ryan Selkis, CEO of the crypto research company Messari, on Twitter.

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While advocates like to claim that the sector will one day render banks obsolete, crypto businesses urgently want access to the established financial system today. Stablecoins, the cryptocurrency sector, and the token market will all be significantly impacted by the failures.

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Contrary to popular belief, bad news can actually be beneficial in the near run for tokens like Bitcoin.

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After the bankruptcies of Silvergate and Silicon Valley Bank, it is now more likely that the Federal Reserve would slow down or even cease raising interest rates, giving a boost to all risk assets, according to Sean Farrell, head of technology platform strategy for Fundstrat. The acquisition by Signature only strengthens that case, and the token marketplace appears to concur: Between 5 p.m. On Sunday around midnight Eastern, the price of Bitcoin increased by about 8.5%.

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Yet, in the long run, it is obvious that the floundering digital asset market would struggle to re-establish contact with the banking system.

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Some in the cryptocurrency sector believe that the three failures represent the climax of a regulatory campaign. U.S. banking regulators have been continuously warning financial institutions about the dangers of offering services to cryptocurrency since January.

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The regulators, which include the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency, claim that banks are not discouraged or forbidden from doing business with any industry. However, many crypto firms claim that the practical result has been to make it nearly impossible to find financial institutions even willing to do is provide basic services.

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With the repercussions from the failure of cryptocurrency exchange FTX, Signature started to remove itself from the industry in December, pledging to diversify its deposit account away from it. Yet, it was still utilized widely by crypto firms.

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Coinbase Global COIN +12.74%, a trading platform, reported having $240 million in corporate money at Signature on Sunday. Paxos Trust Co., a stablecoin issuer, claimed to have $250 million.

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The market for cryptocurrency-friendly banking is severely lacking as a result of the closure of Silvergate, SVB SIVB 0.00% and Signature, according to Jake Chervinsky, chief policy director for the Blockchain Association trade association.

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Despite the fact that some banks continued to open an account for cryptocurrency businesses, others in the sector predicted that regulators would attempt to block bank access.

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"Operation Chokepoint 2.0 may have gotten a little carried away this time, but the danger still exists. They will keep attacking the platforms, services, and businesses that enable direct cryptocurrency ownership, the Kraken trading platform's official Twitter account declared on Sunday. Kraken was alluding to a 2013 Justice Department inquiry of banks conducting business with payday loan companies and other sectors.

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Stablecoins produced by Circle Internet Finance, like USDC, suffered losses over the weekend as well. By promising to let investors exchange their tokens for actual cash in a bank account, USDC and other cryptocurrencies like it attempt to equate its worth to the dollar. They achieve this by keeping reserve funds in reasonably secure investments, such as Treasury bonds and bank deposits.

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That assumption, however, was disproved over the weekend when it was discovered that 8% of Circle's reserves were hidden in Silicon Valley Bank. Circle's token lost its peg and on Saturday dropped to approximately 88 cents on the dollar on cryptocurrency markets.Some exchanges ceased converting USDC, citing having to await for bank transfers to occur during regular business hours. One such exchange is Coinbase, which collaborates with Circle on the coin and makes money from it.

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Another popular closure was the Signature one. Regulators' announcement that the government will reimburse depositors caused USDC's value to return to almost a $1 by Sunday night. However, Circle CEO Jeremy Allaire pointed out that after using Signature to create and redeem USDC, the company will have to start using other banks as of Monday.

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According to Allaire, the business will depend on Bank of New York Mellon (BK). Later on Sunday, the business disclosed a collaboration with Cross River Bank in New Jersey to manage token creation and redemption.

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Allaire stated in a statement: "We've long argued for comprehensive digital currency banking that protects our foundational internet cash and payment services from banking with fractional reserves risk.

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When you're being pursued by banks one after the other, building an industry is difficult.