Critical time for crypto as investors assess SVB damage | Alternatives

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With the banks that had been a key funding source for the cryptocurrency industry going bankrupt, questions arise about where the crypto will go from here. Family investors surveyed by AsianInvestor believe the industry is at a crossroads.

Crypto exchanges and their customers were a big part of Silicon Valley Bank (SVB) and Signature Bank’s deposit base, but any sense of camaraderie disappeared once their weaknesses became apparent.

It’s the opposite of the so-called prisoner’s dilemma in game theory, said Singapore-based family office investor Edward Foo.

“The optimal outcome inherent in this state is ‘self’: to come out before others and at the expense of others. It is not based on an optimal outcome for all parties involved,” Foo told AsianInvestor.

“We are now in the age of instant messaging and a bank run is not what it used to be when people were queuing outside the bank,” said Hong Kong entrepreneur Timothy Tsui.

“The craziest thing is how fast this just happened. Once people get a group message saying this bank might go bankrupt, the first thing they do is log into their bank online and start transferring funds instantly.This has never happened before.

Industry influencers AsianInvestor spoke to revealed that they had received messages from friends working at SVB saying, “Please tell your friends to do business with us, we are the best place to invest your money now.” In theory, they are right, as the government has stepped in to guarantee depositors, but whether that money will come back remains to be seen.

Last year’s “crypto winter” characterized by the collapse of FTX was a sign that the knives were out for crypto. This latest crisis just added to the stack.

Horace Ma, director of Hong Kong family office Mardell Investments, has not been materially affected by the latest banking meltdowns, but he remains skeptical about the future of crypto in its current form.

“These crypto geeks still want a DeFi environment. But that’s unrealistic when all the governments in the world want you to be responsible for every dollar you earn and own, in order to tax you. You will not be able to detach yourself from the fiat money system as long as you have a physical presence in this world. Therefore, all crypto currencies are tied to fiat, and ultimately everything in the crypto world must also be supported in the fiat world.

Henry Chong, Fusang

Henry Chong, managing director of digital exchange Fusang, told AsianInvestor, “There has always been a question about how crypto interfaces with the real world.”

“It has always operated in a slightly parallel system. This latest crisis will highlight that even more. If crypto technology is interesting, it must fully interact with our daily lives. If it claims to be a payment system, can I use it for payments? If I can’t and in reality still need to retransfer, say, US dollars and local currencies to make payments, then this doesn’t really do the job.

IMPLICATIONS FOR INVESTORS

Foo’s view is that while probably only a handful of individuals really have a full understanding of what happened at SVB and Signature, events like these don’t just happen.

“This kind of behavior is by no means isolated. Has anything really changed since 2008/2009? Similarities can be seen with the various scandals that have occurred over the past 9 months in the crypto world.

“Essentially, what does this mean for the world of private equity and venture capital, especially for investors heavily focused on technology?” He said he was concerned about the effect on pension funds if the contagion resulted in substantial cuts.

“Markets and economies are more interconnected than we care to admit.”

As BlackRock CEO Larry Fink noted in his annual letter to shareholders, published this week, “Markets remain jittery. Will active-passive asymmetries be the second domino to fall? »

And maybe a third: “In addition to duration mismatches, we can now also see liquidity mismatches. Years of low rates have had the effect of pushing some asset holders to increase their exposure to illiquid investments, trading lower liquidity for higher yields. There is now a risk of a liquidity mismatch for these asset owners, especially those with leveraged portfolios.

THE FUTURE OF CRYPTO

While the future doesn’t look bright at all for crypto, there’s still room for the industry to pivot toward more meaningful integration, Chong said.

“Last year crypto faced one crisis after another – two rounds of crypto winter, many institutions that blew up, and now this whole banking situation that…has been tough on the crypto industry. crypto B to C. It is now a question of saying how to make it more efficient for the benefit of the financial industry.

Fink thinks that the operational potential of some of the underlying technologies in the field of digital assets could have interesting applications.

“In particular, the tokenization of asset classes offers the prospect of generating efficiencies in capital markets, shortening value chains, and improving costs and access for investors. We continue to explore the digital asset ecosystem, especially the areas most relevant to our clients, such as permissioned blockchains and stock and bond tokenization.

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