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Crypto has been gradually melting down over the last year since consumers and investors discovered that Tether (USDT), the largest stablecoin in the crypto environment, was not fully backed by the US Dollar as the company claimed. USDT has indeed done a lot of things in the crypto market that banks do in traditional finance but without supervision and deposit insurance.
Scams, frauds, and schemes, including the notable arrest of FTX's Sam Bankman-Fried, have added more instability to a sector riddled with risk. Retail investors have lost millions due to rug pulls. However, the uncertainty of the crypto market has finally caught up with institutional investors. California lender, Silvergate Capital Corp, had to sell off assets to cover more than 8 billion dollars of withdrawals after the collapse of FTX ignited a run on the bank, making it the first major casualty of the recent crypto meltdown. Bankman-Fried's companies, including FTX, made up approximately $1 billion of Silvergate Capital Corp's deposits. The bank also had to close down the Silvergate Exchange Network, its main vehicle for helping institutional investors move money between trading platforms.
Silvergate's failure has sparked additional runs. Venture capital investors made a run on Silicon Valley Bank on Thursday, March 9, leading to its seizure on Friday. On Sunday, March 12, regulators seized control of Signature Bank. This is after its customers moved more than $10 billion in deposits to many of the bigger banks.
It seems that crypto-focused banks are still in trouble and we might see more failures in the future. It's likely stakeholders involved with Silvergate, SVB, and Signature see the conditions that led to their demise. Yet, with more stable choices and less risk, these banks might still be operating today.
The 1990s saw the explosion of the dot-com bubble, with hundreds of tech start-ups going under, costing investors millions. Fast-forward to the 2007-2008 Global Financial Crisis, when risky lending practices left banks holding trillions in subprime mortgages. Bitcoin emerged in 2009, making crypto the new thing even after earlier versions of digital cash technologies were around. The massive early success of Bitcoin coupled with other new digital assets like Litecoin and Ethereum and meme coins like DogeCoin and Shibu Inu presented an opportunity for banks. However, the opportunity to service cryptocurrency companies comes with massive amounts of risk.
Silvergate, SVB, and Signature Bank are only a few examples of banks that opened themselves to the crypto industry. In fact, Signature only introduced crypto to clients in 2018 to help grow deposits. Like other crypto-friendly banks, they created an around-the-clock payment network for crypto clients and accepted billions in deposits related to digital assets. These failures eliminate many options for crypto firms, creating a market that has even less liquidity and making it more difficult for crypto companies to operate and pay their employees. It creates an opening for new banks to step in and offer loans to crypto firms. But is this the right move?
In an October 2022 report, the Department of Treasury spends more than 25 pages outlining the risks of crypto-assets for consumers, investors, and businesses. Banks who want to create relationships with crypto firms face various risks because of the lack of regulation. The ecosystem of the market, including dynamic technology, permanent transactions, and information gaps between consumers and investors make crypto an attractive target for criminal activity. The growth of the crypto market has brought more fraud, theft, and scams. These numbers should give banks and their decision-makers pause before committing to business with crypto firms.
Until cryptocurrency becomes stable and regulated, it's a risky business for retail investors, institutional investors, and those who serve them.
Legacy banks aren't suffering at the same level during this crypto market meltdown. This is because most didn't sell off traditional businesses to focus solely on crypto. However, some banks find themselves in a different situation. The failures of Silvergate, SVB, and Signature show the contagion. Silvergate was able to prolong its collapse and handle the billions of withdrawals because it kept most of its deposits in cash or liquid securities, instead of tying them up in loans. However, some crypto-friendly banks don't have the means to cover a massive run. They must sell assets at a loss, and still won't have enough to prevent failure.
Compounding the issue, recent crypto bank failures have put concerns about crypto exposure at the forefront of everyone's mind. Regulators have shown concern about even the smallest amount of crypto exposure for banks. If new regulations arise in the coming months, it could force crypto-friendly banks to get out of the business altogether.
Legacy banking is a safe and healthy environment. Inserting crypto, NFTs, and other digital assets into the equation introduces undue risk. It's best for banks to stick to their business: taking deposits and making loans.
The senior management team at Garnet Capital Advisors has more than 100 years of experience in loan sales advisory. The managing partners are involved in every transaction to ensure clients get the help they need.
If you need to add loans to your books or find yourself in a situation where you must sell loans because of large deposit outflows, we can help. We assist clients with loan sales by providing access to a healthy secondary market. Contact us today to discuss your loan portfolio or submit your information through our online contact form.
Garnet Capital Advisors 500
Mamaroneck Avenue, Harrison, NY 10528
(914) 909-1000
info@garnetcapital.comGarnet Capital Advisors 500
Mamaroneck Avenue, Harrison,
NY 10528
(914) 909-1000
