Banks Avoid Crypto, but Industry Sees Potential

In the aftermath of the latest banking crisis, institutions are putting clear blue water between them and the crypto sector. How worried should the industry be about the banks’ standoffishness? Some analysts believe there are long- and short-term benefits.

Over the course of less than a week, three of the US tech industry’s biggest banks wobbled and then collapsed. It was the largest bank crisis in the US since the financial meltdown of 2008. 

But the crisis wasn’t over. On March 14, Credit Suisse’s shares plummeted following the discovery of “material weaknesses” in its financial reporting, leading to a turbulent five days for the bank. Eventually, UBS, another major Swiss bank, stepped in and agreed to acquire its troubled rival.

The S&P 500 Banks Index Is Down

Last week, concerns about the global banking sector resurfaced amid a sharp drop in European banking shares. On Friday, Germany’s Deutsche Bank saw a 14% fall in shares, and other financial institutions floundered.

The S&P 500 Banks Industry Group Index, a stock market index that tracks the performance of the 15 largest publicly traded banks in the United States, is down roughtly 19% over the past month.

The head of the International Monetary Fund, Kristalina Georgieva, has cautioned that these wobbles pose a risk to the global economy. She pointed out that rising interest rates have led to pressure on debts, causing “stresses” in leading economies and among lenders. Georgieva expects the world economy to only grow by 3% this year due to rising borrowing costs, the war in Ukraine, and the aftermath of the Covid-19 pandemic.

“At a time of higher debt levels, the rapid transition from a prolonged period of low-interest rates to much higher rates – necessary to fight inflation – inevitably generates stresses and vulnerabilities, as evidenced by recent developments in the banking sector in some advanced economies,” Georgieva told a conference in Beijing on Sunday.

Crypto Is Not an Island

This banking crisis is materially different from the one in 2008. Back then, sentiment contagion, as some analysts are calling it, was a slower beast. It was before the era of widespread smartphones and mobile banking apps. Perhaps most importantly, it was before Twitter could carry and amplify sentiment in the blink of an eye.

Yet in an interview with BeInCrypto, Gabby Kusz, CEO of the Global Digital Asset & Cryptocurrency Association, suggested that industry players have moved to address any contagion or related issues. “We have seen Silicon Valley Bank (SVB) right itself within a few days, and it is presently functional and servicing customers. This injects a certain degree of confidence back into the system. I would expect [something] similar from Signature and others,” said Kusz.

“In the near term, you have seen a flight towards crypto in what [is clearly] a move away from perceived instability in the traditional financial sector. It is for this reason that you see increases in price in Bitcoin and other digital assets at the moment,” Kusz added. “In the longer term, I believe the cryptocurrency market will benefit from these growing pains and will continue to grow, mature, and stabilize over time.”

Over the longer term, Kusz believes that the crypto sector will face regulatory repercussions even though it was not responsible for the collapses of SVB, Credit Suisse, and Signature. Former congressman Barney Frank said the closure of Signature Bank, on whose board he sat, was a clear message.

“Well – message received,” added Kusz. “I fully expect that there will be several hearings over the course of the next few months in relation to this subject with intentional efforts to link crypto to the challenges we have seen within SVB and Signature.”

Banks Choose to Avoid Crypto

Crypto markets often ebb and flow in line with the wider economy. How much should the crypto industry worry about the current state of the banking sector? In recent weeks, the industry has lost two of its most important providers of banking services. Signature Bank has recently reopened. But the rescue arrangement with Flagstar Bank did not cover the crypto accounts made earlier this month.

First Citizens Bank’s recent acquisition of most of SVB specifically excluded cryptocurrencies and crypto-backed loans. Despite SVB’s reputation for serving the tech industry and venture capitalists. The March 10 failure of SVB had a significant impact on global banking. But First Citizens made sure to avoid any potential association with the controversial sector.

“In the short term, the reduction in banks open to do business with the crypto industry is undoubtedly causing chaos as companies that are getting de-banked scramble to find willing partners,” Kristi Põldsam, co-founder of Sommelier Finance, told BeInCrypto. “The reality is that users need on-ramp paths to get from dollars in their bank accounts to digital assets on-chain. Currently, banks are needed to mediate that process.”

Bitcoin May Benefit

“In the longer term, however, I believe these kinds of issues will become obsolete,” Põldsam added. “We are seeing the creation of new financial rails where the functionality that banks, exchanges, hedge funds, and so on, becomes available to anyone with an internet connection, and with the added benefits of greater transparency as well as self-custody of assets. The current relationships between the legacy banking infrastructure and the new financial infrastructure we’re building on blockchains will therefore evolve with more and more of what banks do moving on-chain, so that there’s increasingly less reliance on those institutions.”

Bitcoin’s price movements during the crisis have been mostly positive. Since a significant dip in the first third of March, BTC may end the month on a relative high.

In Põldsam’s view, an opportunity exists for legacy cryptocurrencies like Bitcoin, as banking customers look to digital assets for a safe haven. Põldsam believes people are “looking for better alternatives.” 

“Self-custody of assets on blockchains is naturally appealing, and I think we’re seeing that draw with people flocking to Bitcoin,” Põldsam added.