Today we will take a good look at this bullish Q1 and try to understand why the crypto sector is reacting so strongly to the banking crisis that has been shaping up until now.
An introduction to the problem.
The failure of Silvergate and Signature has deprived companies in the sector, which was already experiencing great difficulty, of the only institutions willing to directly collaborate on their main endeavours.
When Citibank, one of the major US banks, prevented the Swan Bitcoin trading platform from accessing its bank account in October, it did so without giving prior notice or explanation.
The only confirmation of the incident came in the form of a cheque with the balance of the company’s account, which was delivered to the former home address of Cory Klippsten, Swan’s CEO. ‘There was absolutely no notice,’ Klippsten recounts; ‘we received no phone call, no email, no letter by regular mail, no nothing. They simply shut everything down.
Swan was able to continue paying its employees through a secondary account at another bank, but for a smaller company Citibank’s decision could have posed an ‘existential threat’, Klippsten adds.
The cryptocurrency industry still needs banks at the moment. Without a banking partner, companies in the industry cannot accept money sent by users in exchange for services or tokens, nor are they able to pay employees or suppliers.
In essence, the attempt to build a parallel financial system without intermediaries is based on an agreement with those same intermediaries: the banks.
Wall Street has often been reluctant to work with cryptocurrency companies, and it’s only in the last five years or so that we have started to see more and more institutional entities entering the crypto market with a real interest in the sector.
For this reason, many of the DeFi ecosystem players have relied exclusively on just two US banks, Silvergate and Signature. The two institutions have proved invaluable to customers involved deeply in the cryptocurrency world, offering real-time payments outside of traditional banking hours.
In the first quarter of this year, however, both banks have been forced to close their doors: Silvergate due to its overexposure to the cryptocurrency sector, which at the time was experiencing almost the same level of trouble the banking sector is now, and Signature due to a liquidity crisis triggered by a sudden wave of withdrawals.
This has brought many cryptocurrency companies, especially smaller ones, back to square one: without their own bank and with few alternatives available.
‘The challenge for cryptocurrency companies is mainly banking,’ explains William Quigley, co-founder of the platform that issues the stablecoin Tether. ‘Many people in the cryptocurrency industry are denied access to banking services. It’s a real problem.
The complicated relationship between institutionalized finance and neo-finance.
When multiple cryptos began to grow in the early 2010s, traditional banks often showed a reluctance to work with an industry they considered inherently risky. But as the industry gradually became mainstream in recent years, Wall Street also began to feel more comfortable. Big banks such as JP Morgan and BNY Mellon began operating cryptocurrency exchanges, allowing their customers to deposit and trade digital currencies directly from their own apps.
Regulators have started to keep an eye on the sector, but have not intervened significantly in shaping the various rules governing it.
Then with the advent of 2022, multiple cryptocurrencies collapsed thunderously. In May, the failure of the Earth-Moon stablecoin pulverised an estimated $60 billion, triggering a chain reaction that would later bring down cryptocurrency lending company Celsius, hedge fund Three Arrows Capitals, and others.
And finally, what seemed the last nail in the coffin. We all know that in November came the implosion of the Ftx exchange, whose founder was charged with twelve counts, including bank fraud, wire fraud and money laundering.
Although the consequences of the collapse of some of the pillars in the cryptocurrency ecosystem did not spill over into the mainstream financial sector, regulators felt compelled to ensure it stayed that way.
In a joint statement on the third of January, the Federal Reserve (Fed), the Federal deposit insurance corporation (Fdic) and the Office of the Comptroller of the Currency (Occ) emphasised that cryptocurrencies pose a ‘significant risk’ to banks.
“It is important that risks related to the cryptocurrency asset sector that cannot be mitigated or controlled do not migrate to the banking system,” the agencies wrote, clarifying, however, that US banks are “neither prohibited nor discouraged” from transacting with cryptocurrency firms.
Since the beginning of the year, regulators and the US government have again urged banks to limit their exposure to cryptocurrencies. Moreover, in late January, the Fed announced that it had denied Custody, a US state-owned bank offering cryptocurrency custody services, a request to join the central bank and open an account, which would have allowed it to compete on an equal footing with the big national banks.
While this may seem like a way for the U.S government to control the crypto world, the reality is much more nuanced than that, and the collapse of multiple institutional banks in the following weeks showcases how the current state of the world is affecting multiple strata of our socio-economical ecosystem.
The collapse of Silvergate and Signature
Almost all the well-known names in the industry, and many smaller ones, therefore turned to the only two institutions that continued to welcome cryptocurrency companies: Silvergate and Signature.
Silvergate was the first to fall. The bank found itself in trouble after two of its clients, Ftx and its subsidiary Alameda Research, collapsed, prompting clients to withdraw billions of dollars. Silvergate eventually filed for bankruptcy on March 8, and the US Department of Justice reportedly opened an investigation into the institution for services provided to Ftx and Alameda.
Signature’s situation was different. Since last December, the bank has been trying to diversify its customer base to avoid excessive concentration of its activities. Apparently, however, its reputation as a ‘cryptocurrency bank’, combined with the panic following the bankruptcy of Silicon Valley Bank, the first institutionalized bank that felt on its own skin the effects of this year’s crisis, was enough to trigger another run on the bank, leading the FDIC to take over the institution on the 12 of March.
In an interview with Bloomberg on Sunday, 11 March, Barney Frank, a Signature board member and former US Congressman, stated that Signature could have survived, but that regulators ‘wanted to send a message to get people away from cryptocurrency’.
Stephanie Collins, head of media relations at Occ, stressed that the agency does not have oversight of Silvergate and Signature, but did not respond to questions about coordination between US banking authorities.
Are we looking at multiple targeted attacks towards the crypto sector?
In any case, the idea that regulators have it in for cryptocurrencies has taken hold in some industry circles. Even before Silvergate and Signature were shut down, members of the cryptocurrency community — such as the CEO of the exchange Kraken — were already shouting conspiracy, describing the regulators’ choices as a coordinated attempt to cut cryptocurrencies out of the banking system, an interpretation also embraced by some US senators.
Others, however, are less convinced of the theory. Economist Frances Copolla, who worked in risk management for HSBC and at the Royal Bank of Scotland, does not think there was a ‘coordinated attack on cryptocurrencies’, but rather that the failure of Silvergate and Signature is a reflection of the fragilities of their business models.
For Caleb Franzen, an analyst at research firm Cubic Analytics, rumours of alleged tactics being deviously deployed by regulators are nothing more than ‘pure speculation’.
And while both fronts are offering some compelling arguments what we do know for sure is that while this article is being written, institutionalized banking is facing its largest crisis since 2008, while the DeFi ecosystem is surging, showcasing exactly how important a decentralized system is for the future of our economical freedom, but this is something that we will explore later, once we have all the facts down on the table.
The times are always changing.
Regardless of whether there is a design behind it or not, cryptocurrencies now have to deal with the banking crisis in the US. The closure of Silvergate and Signature has prompted companies in the sector to urgently seek new banking partners.
In the last week Circle Internet Financial — whose stablecoin, Usdc, temporarily lost parity with the dollar due to exposure to Silvergate and Svb — reached an agreement to extend its relationship with the bank Bny Mellon.
But not all companies were so lucky: cryptocurrency investment companies MaiCapital and Digital Asset Capital Management directed their search for new banking partners outside the United States, while trading platform LedgerX was forced to find a new bank for the second time, after initially switching from Silvergate to Signature.
Given their continued importance to banks, the largest cryptocurrency companies are likely to keep their accounts in the US, points out Nic Carter, general partner of venture capital firm Castle Island Ventures. This means that those residing in the country will still be able to access cryptocurrency exchanges.
But smaller companies are ‘struggling,’ Carter continues. Some companies are likely to migrate to countries with more favourable regulatory regimes, while others will struggle to obtain venture capital, which is linked to access to banks; according to Carter, other companies will simply not be started.
With the demise of Silvergate and Signature, the only two banks that allowed real-time payments at any time and any day of the week, the cryptocurrency industry will have to get used to operating at a different pace.
Klippsten does not buy the idea that US regulators have launched a coordinated assault on the industry, under the leadership of ‘one man pulling the strings from behind the scenes’. Swan’s CEO is also more optimistic about the prospects of the companies left ‘orphaned’ by Silvergate and Signature when it comes to finding new banking partners: ‘Banks are usually happy to take your money.
Klippsten also understands the desire on the part of regulators to combat fraud in the cryptocurrency sector. But the frustrating thing, he continues, is that legitimate cryptocurrency companies are seen as collateral damage.
‘Since cryptocurrencies are shady and some companies are run so badly, the whole category is toxic,’ he says. ‘So it’s hard to ask a bank with hundreds of thousands of accounts to make a distinction between good cryptocurrency companies, run by mature adults. We all get thrown into the same pile.
And Yet It Rises.
A rally, that of Bitcoin, on which few would have bet in the midst of a crisis whose contours are still difficult to draw, even though the ECB, the Fed and the world’s highest political authorities are quick to repeat that this is not 2008 and that the banking system is solid, liquid and with good cushions to protect itself from shocks, even unexpected ones.
Some, romantically but not too romantically, also read into it a law of counterpoise: while all the world’s most important banks distanced themselves from Bitcoin, it was the old system of traditional finance that went into crisis, and went into a crisis for a second time in little more than fourteen years.
Despite the crypto crisis, despite the banking crisis, despite everything, BTC has hit its highest peak in 9 months, reaching briefly the 29k target in the last week of March. Many people are looking at the portfolio of whales, following them around, and CEXes and DExes are seeing more volume now than they did for the whole of 2022.
We are soaring because people fear another 2008, we are soaring because the traditional banking system has offered no alternative to an overly regulated hedonism party for the rich, and we are soaring because retail is becoming stronger and stronger each year.
More people are being exposed to the digital world, and, just like Game Stop taught us when many smaller investors are working together towards a bigger goal, the market can’t really be predicted nor influenced in any significant way.
We are seeing the apex of psychological investing and the reason why technical analysis will always work with probabilities. Because even the best graph in the world can’t perfectly showcase the cluttered mess that shapes up the will of the market, and the will of the market is becoming more and more the will of the people.
A couple of big portfolios can start it on their own, but the driving force behind any breakout is localized in the people propping up the entire market, and when the banking system loses its illusion of security the DeFi world looks more appetizing than ever. After all, if the risks are the same, why shouldn’t you look for higher profits?
It is also curious to pause for a moment to remember how we got to this point. Shortly before the Silicon Valley Bank case, several crypto banks had ended up in the dock because they were deemed risky, illiquid and close to bankruptcy. The Silvergate troubles seemed to have confirmed this reading, which would have been great political support for the US authorities to impose more restrictive regulations.
More restrictive regulations would have affected both exchanges and the banks that offer them services. Then came the Silicon Valley Bank case, a bank with little connection to the crypto world whose failure was creating a reverse contagion effect to what everyone would have expected. That is risks transferred to and not from a crypto project, with USDC spending just two weeks ago a weekend of fear and delirium, only to recover parity with the dollar.
So yeah, It rises, because people are scared by what traditional finance has been doing behind our backs and because while this market is a volatile one, at least it has the decency to let you know the risks in advance.
And while we are taking advantage of this rally, while we are consolidating our gains and booking out to prolong this bullish run, we know and we want you to know that we are still very much in a crisis.
The world problems have not been solved yet, and we believe that the real winners will be the people able to take advantage of this Bull Quarter while preparing themselves for sideward, downward, upward and oblique movements because we will still have to face many troubles before being able to fully enter the next golden cycle.
So buckle up people, be smart about your money, solidify your gains and protect your interests, because we will keep pumping out awesome opportunities, no matter the market state, and you don’t want to miss it.
Synapse’s selection process has already protected a myriad of investors in times more troubled than those, as you can clearly see by our launchpad stats, our protection program, our anti-bot solutions and much more, but we aren’t satisfied with that.
We want to keep going up, grow and give more and more people the chance they deserve to achieve financial freedom.
This is why while everyone is just pumping out full on how BTC will go to the moon this week, how will we see it at 100 million by the end of the year or other outrageous statements, we simply want you to know that Synapse every day strives to make your investments more secure, more profitable and more accessible so that when the time does come, we can all ride the green waves together.
The mainstream market and the crypto market have always been tied together but with the advent of more and more digital prowess in the new technologies that the human race keeps pumping out each year, we are reaching levels of interconnectivity that we couldn’t comprehend just a couple of years ago.
Institutionalized finance is failing right now, and the BTC is looking like an asset that can help smother this failure, and so many people are flocking to it, but we aren’t out of trouble yet and so we want everyone to keep being smart, be it with their investments, their bank choice or their crypto portfolio.