How Politics Shaped Cryptos Banking Outlook

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For years, crypto businesses have grappled with an inability to establish and maintain banking relationships, a situation downstream of a general lack of regulatory clarity. Today, banks in the United States and, it seems, the European Union, are facing increasing pressure to steer clear of the crypto industry. While that might sound like a positive thing for a movement seeking to establish a parallel financial system bound by code rather than human intervention, a return to a lack of banking access would be devastating for a lot of crypto.

But that’s an unlikely scenario. Instead, in the coming years, more banks with higher profiles are likely to be willing to work with crypto firms. Better policy will be put in place, and mature crypto businesses that survive or start in the bear market will have to adhere to stricter regulations and undergo greater scrutiny. This prediction is partly based on a hunch, and a few background calls with bankers who could not be registered and who said that crypto is still an area of ​​commercial development. While things look grim, it’s important to recognize that bitcoin hasn’t hit zero and much of the industry is more than holding its own.

This article is part of CoinDesk’s “Policy Week”. A version of it first appeared in The Nodenewsletter.

Crypto isn’t going away, in other words, and the longer that holds true, the more likely banks will see it as an area for growth again. But compliance is dear to banks, and there is a patchwork of laws that wind their way through federal and state legislative processes that can place stringent requirements on banks and their crypto customers. There are a number of institutions, such as crypto exchange Coinbase and stablecoin issuer Circle, that already operate more like fintech companies than crypto anarchists. It is this form factor that banks will try to sell banking services to.

Far from challenging banks, regulated blockchain products and the companies that build them will only improve legacy financial activities.

All of these cuts go against the trend of crypto-friendly banks pulling out of the industry. These few relatively small regional institutions have seen digital assets as an opportunity for growth and have been summarily battered by the market downturn. The Metropolitan Commercial Bank, which had 6% of its deposits with crypto firms, will cut ties by the end of the year with its crypto clients in light of recent developments and regulatory changes. Signature, which is not fully retiring, is reducing its activities, including recently imposed restrictions on its relationship with the Binance exchange.

Signature and its competitor Silvergate, the quintessential crypto bank, have both seen dramatic declines in crypto-related deposits. This is partly because the two offered similar business-to-business payment rails Signet and Silvergate Exchange Network, respectively, which facilitated the exchange of hundreds of billions of transfers between their crypto clients. Both companies lost an incredible amount of customer crypto withdrawals last year and have since taken out loans from the US Federal Home Loan Banks System (FHLB), an agency created during the Great Depression to support the industry. mortgage. (It turns out there is a buyer of last resort for crypto, the US taxpayer.)

However, the worst may not yet be over. Silvergate, a much smaller bank with relatively much broader exposure to crypto, may be involved in the ongoing FTX fallout. It sold assets at a steep discount last quarter to effect $8 billion in client withdrawals, and has lost more than it has ever made from crypto since entering the industry in 2014 This may seriously deter other banks from thinking about crypto, all the more so because some of Voyager Digital’s most prominent clients, Celsius Network and BlockFi have failed and filed for bankruptcy.

Meanwhile, three US government institutions issued a letter earlier this month strongly discouraging banks from trading crypto. In a joint statement on January 3, the US Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) said that issuing or holding cryptocurrencies, linked to decentralized public networks, was “very likely to be incompatible with safe and sound banking practices.

“It is important that risks in the crypto-asset industry that cannot be mitigated or controlled do not migrate to the banking system,” the letter read. Similarly, across the pond, the European Parliament’s Economic and Monetary Affairs Committee is seeking to limit the amount of unsecured cryptocurrencies lenders can hold as a preventative measure intended to thwart the risk that problems of the digital asset industry does trickle down to the wider financial system.

A leaked version of a bill, which has yet to be passed by the upper chambers of government in the European Union, will require banks to hold an equivalent amount of fiat for every euro they hold in crypto, CoinDesks reported. Jack Schickler. While this may seem onerous, it is not far off the collateral requirements used by blockchain-based lenders such as Maker, the issuer of the dai stablecoin, which have weathered the crypto contagion better.

None of this is hard to interpret: it will be harder for banks to manage crypto. Regulators have taken a victory lap claiming to insulate traditional finance from crypto-contagion. As Sen. Elizabeth Warren (D-Mass.) said, when discussing FHLB loans, that’s why I warned of the dangers of allowing crypto to intertwine with the banking system. case, taxpayers should only be left to hold the bag for the collapsing crypto industry, a market brimming with fraud, money laundering, and illicit financing.

See also: EU plans draft law on digital euro, metaverse policy for May, Commission says

But, crucially, no outright banking ban is suggested, a premise that runs counter to the commitment to free markets and regulators’ goal of promoting capital formation. As long as the majority of crypto users buy into the crypto economy with fiat and intend to walk out with dollars in their pockets, crypto businesses will need banks. Likewise, banks need deposits.

The hope is that the industry changes enough that the headline and reputational risks Warren mentioned remain historic. Crypto is already learning to embrace new ways of presenting itself and will forever be changed by increased government oversight and stipulations. Regulation is a sieve, it can filter out products for which there is clear demand, like lending platforms, but can also prevent the next Gemini-Genesis imbroglio. But anything that passes by definition would be bankable, even if its crypto is only in name.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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