Banks Involved in Crypto Cut Costs and Pull Back as Industry Suffers Losses

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Banks engaged in cryptocurrency-related assets are cutting costs and exiting the space after increased regulatory scrutiny and deposit losses.

Several banks suffered heavy deposit losses related to digital assets in 2022 as prices and volumes declined and FTX Trading Ltd., BlockFi Inc. and Voyager Digital Ltd. filed for bankruptcy.

Federal regulators issued a joint statement this month warning of crypto-asset risks for banking organizations, including volatility, risk susceptibility and fraud. Regulators have indicated they will oversee banking organizations exposed to crypto-asset risks and carefully consider any proposed engagement in the space.

Works on Digital Asset Deposits

Provident Bancorp Inc. said in November 2022 that it would incur an estimated $27.5 million in loan losses due to the decline of the crypto industry and that losses could exceed that estimate.

The company also entered into an asset purchase agreement under which it took over cryptocurrency mining rigs as collateral in exchange for forgiving a $28 million loan.

Silvergate Capital Corp., which primarily focuses on crypto, reported a 68% drop in digital asset deposits to $3.8 billion from $11.9 billion in the fourth quarter of 2022. company announced a 40% reduction in its workforce after its stock fell 46% in early trading on Jan. 5.

Silvergate’s survival of the $8 billion cash race was “breathtaking”, but its risk-mitigation strategy has proven successful, said Don Musso, chairman of FinPro, a banking financial planning firm. , in an interview.

“Crypto is really in a nuclear winter, but really, it’s just where it was before COVID,” Musso said. The company is dependent on other banks pulling out of the space and leaving it as one of the few major players left, he added.

In an investor call on Jan. 5, Silvergate CEO Alan Lane said the sector was going through a “crisis of confidence,” but suggested the company’s focus on digital assets could make it one. attractive target for future mergers and acquisitions. The company said on its fourth-quarter 2022 earnings call that it will cut costs, including ending some non-core customer relationships and eliminating products that are too expensive or complex.

Get out of crypto

Metropolitan Bank Holding Corp. chose to exit its crypto-asset vertical business entirely earlier this month, but the business represents only 1.5% of company revenue and 6% of total deposits, so the expected financial impact output is minimal. .

The company began to pull out and cut crypto in early 2018 during the industry’s previous downturn, largely because it was unwilling to pay interest on digital deposits when others companies were, Chris O’Connell, an analyst at Keefe Bruyette & Woods, said in an interview.

“As everyone has stepped up, Metropolitan hasn’t really added customers in this space,” O’Connell said.

Metropolitan’s digital asset deposits have grown further in recent years as crypto prices and volumes have grown, but those deposits have taken a hit in 2022, and increased regulatory scrutiny has only made those deposits even less desirable, he said.

“It’s just sort of the band-aid coming off,” O’Connell said. “It’s just not worth the amount of resources you would have to move around to support those customers.”

Another firm, Signature Bank, said in December 2022 that it would cut crypto deposits from $8 billion to $10 billion between Q4 2022 and Q1 2023 after the company’s crypto deposits fell by over $6 billion.

“It just created a lot of headlines and a bit of volatility in their funding,” Piper Sandler analyst Mark Fitzgibbon said. “They want to reduce it to a level where they feel like it’s just more manageable.”

Still, executives stressed that Signature will not exit cryptocurrency altogether. Signet, Signature’s blockchain payment network, was one of the drivers behind the company’s decision not to exit, Fitzgibbon said.

“They think this digital payment business can be used not just for crypto, but for many businesses,” Fitzgibbon said.

Next steps for regulators

This month, Signature CEO Joseph DePaolo called on regulators for practical advice to weed out unqualified players and restore trust in digital banking assets as the company is eager to make improvements to Signet. .

“It puts us in a difficult position as to what we do next, and not knowing what’s going to happen regulatory-wise really puts us behind everyone else,” DePaolo said.

Regulators ‘strike hard’ with ‘almost explicit moratorium’ on banks’ involvement in crypto, but if regulators adopt risk-mitigation strategies and guidance around cryptocurrency, more banks could do it again to enter space, Musso said.

Until then, FinPro advises its clients to do some analysis before entering the crypto space and limit their involvement in holding crypto-assets as deposits while avoiding lending against the value of the crypto. -currency.

“I would definitely not extend withdrawals with crypto collateral to the bank,” Musso said. “I don’t think banks need to be early adopters here. I think that’s probably too big of a risk.”

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