The ongoing extinction of banking options for crypto firms might not cause an industry collapse. But token traders in the short-term are likely to find increased costs and market inefficiencies while companies try to re-establish connections to the traditional finance system.
Digital-assets firms had already struggled this year to hang on to their banking relationships amid stringent regulatory guidance. Then, in less than a week, three of the banks most willing to work with the industry -- Silvergate Capital (ticker: SI), SVB Financial Group, and Signature Bank--went out of business or announced that they would do so.
An immediate concern for some crypto traders was what would happen to their own cash held on platforms such as that run by Coinbase Global $(COIN)$, should one of its partner banks fail. As of March, Coinbase said Signature was among the banks holding customers' cash.
To that end, Coinbase says customers have some protections.
Coinbase says it structures deposits so that customers would get up to $250,000 of "passthrough" insurance from the Federal Deposit Insurance Corp. if one of the banks were to fail. For deposits to be eligible for such insurance, Coinbase or other exchanges offering it would need to keep accurate ownership records that pass muster with the FDIC. There is no way for customers to know whether they're protected for sure unless a bank actually fails, experts say.
"Prudent 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 to a Sunday night tweet from the company that said 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, S.D.-based Pathward Financial $(CASH)$.
Some stablecoin companies, such as Gemini Trust Co., which issues GUSD, also say they offer passthrough protection to some token holders.
Rather than losing any cash in one fell swoop, crypto traders will likely find a return of higher costs, low liquidity, and market inefficiencies while crypto companies try to reconnect to the financial system.
Over the weekend, for example, Bitcoin traded on the Gemini exchange at a consistently higher price than on other trading platforms, noted Dave Weisberger, who heads market-data firm CoinRoutes.
A month ago, market makers and other traders could quickly arbitrage such a discrepancy away. Even though banks often can't process certain types of money transfers outside of business hours, Silvergate and Signature each ran widely used 24/7 networks to transfer funds between their own customers, which included major crypto exchanges. But now that those networks are defunct, it's harder for traders to close that gap.
The same reliance on banks helped cause stablecoin USDC to lose its one-dollar peg over the weekend. Stablecoins try to maintain their peg by holding an equivalent amount of traditional assets, like bank deposits and Treasuries, in reserve. USDC issuer Circle Internet Financial panicked some traders when it disclosed $3.3 billion was locked up in Silicon Valley Bank.
But just as important to the de-pegging was the fact that some firms found it difficult to process conversions between USDC and regular dollars while banks were closed.
"During periods of heightened activity, conversions rely on USD transfers from the banks that clear during normal banking hours," Coinbase said late Friday. The firm began to process conversions again on Monday.
Some crypto executives spent the weekend sharing with each other names of remaining banks still willing to take on crypto clients.
One such bank, Cross River, took on some banking services for Circle, the company said on Sunday.
Though crypto firms have talked eagerly about eschewing the banking sector, "what is clear is that there's 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 still doing business with crypto firms include Western Alliance $(WAL)$, Customers Bancorp $(CUBI)$, JPMorgan Chase, and Bank of New York Mellon $(BK)$, according to a research note published Thursday by Needham analyst John Todaro.
The closures over the past week have also increased crypto firms' interest in finding so-called "decentralized finance" applications to move money rather than using banks, Todaro said.
But such DeFi dreams will likely take years to materialize fully, if they ever do. For now at least, it's clear that crypto firms need banks more than banks need crypto.
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