What the crypto industry goes through after losing two of its main banks

In the last four days, two of the biggest banks in the U.S. that serve crypto-related businesses have shut down their operations.

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The collapse of Signature Bank, whose assets were seized Sunday evening by regulators, has been viewed as inevitable by some investors following the impending liquidation of Silvergate Bank as well as the increasing regulatory hostility toward crypto companies as a whole. This event has now passed, and young crypto startups based in the United States no longer have a huge number of options for banking relationships as a result.

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Conor Ryder, a research analyst at Kaiko, said there is a kind of black mark hanging over crypto deposits for the next few weeks. “It may be that one of the smaller banks will decide to raise their hand and take on the deposits, but I don't think they will be jumping at the chance to do so after everything was done over the weekend."

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There are two main priorities facing the crypto industry at the moment, and they revolve around diversifying on-ramps into crypto and educating policymakers about it. Before Silvergate and Signature ended, the regulatory crackdown on crypto had already begun before the end of Silvergate and Signature. Those dark days before the industry had crypto-forward banks to turn to were some of the darkest times in the industry's history. A major obstacle to the growth of the company was the inability to establish banking relationships.

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In a joint statement issued at the end of February, three of the nation's biggest banking regulators warned banks of the liquidity risks associated with dealing with crypto companies. The Wyoming-chartered special purpose depository institution and the famously unleveraged Custodia Bank set off the de-banking wave in January when its application to become a member institution of the Federal Reserve was denied.

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“The regulators are sending a clear message to banks and law firms: If you are involved with crypto companies, stay away from them,” said Ric Edelman, a founding member of the Digital Assets Council of Financial Professionals.

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“It is blatant bias without legal standing, and if sustained, it will harm U.S. innovation for decades to come,” he said. “The situation of crypto companies is similar to that of cannabis companies a decade ago, at least for the moment.”

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Stablecoins in focus

There is evidence that stablecoin regulation is set to take center stage as the industry scrambles for banking alternatives, according to a variety of crypto market participants who are skeptical that the remaining banking institutions will welcome crypto with open arms. Crypto firms have the opportunity to transact in stablecoins, which is one of the most obvious paths to follow. 

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Several stablecoin crypto-pairs have risen above 90% of trading volume on exchanges in the last year, up from 79% a year ago, as stablecoins have outperformed the dollar in terms of the trading volume. "The industry has become less and less reliant on the U.S. dollar over the last few years, and crypto firms are already familiar with stablecoins, so it might be easier than people think to make the transition."

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Stablecoins also provide a 24/7 payment system that can be used to make payments, according to him. As a matter of fact, both Silvergate as well as Signature provided a service that allowed the easy transfer of fiat money into crypto assets. The industry has been feeling the loss of the Silvergate Exchange Network and Signature's Signet platform, even if another bank now opens its arms to crypto companies.

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Kaiko reported Monday that US exchanges are already suffering from a lack of liquidity. Gemini was down 74% for the month, Coinbase was down 50%, and Binance.US's liquidity was down 29% during the same period. There was, however, a smaller impact on Binance, which was 13%.

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Ryder explained that the issue with the stablecoin route is that it concentrates trust in a handful of stablecoin issuers, who would likely need to be more heavily regulated in order to maintain trust among their customers.

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The USDC stablecoin, which is based on Circle's stablecoin USDC, has broken its peg to the U.S. dollar over the weekend, dipping below 87 cents. Apparently, the frenzy was sparked by Circle's announcement that it has about $3.3 billion in SVB in its account. It regained its peg Monday.