What the bank failures mean for crypto

Are you keeping up with those other two banks that both start with an “S” and failed the same week as Silicon Valley Bank?

Silvergate Bank announced March 8 that it was shutting down of its own accord and regulators took over Signature Bank on Sunday. All three of these institutions were known for catering to a specific clientele. For SVB, it was tech startups. For Silvergate and Signature, it was cryptocurrency companies.

So what does the collapse of two of the crypto-friendliest banks mean for that industry?

Marketplace’s Meghan McCarty Carino talked about it with Laura Shin, a crypto journalist and host of the “Unchained” podcast.

Below is an edited transcript of their conversation.

Laura Shin: The crypto world in general is having a lot of trouble getting bank accounts. They’re having a lot of trouble with any kind of relationship they might have with banks. And it does seem that the message that we’re seeing from regulators, both in formal pronouncements as well as in these different regulatory actions, is that the crypto industry probably should be cut off from the banking system. The other thing that I’ve been hearing from people who work with a lot of crypto entrepreneurs is that many of them are just going to other jurisdictions, and it does look like Asia is going to be picking up a lot of business because that’s where a lot of these entrepreneurs are going. It’s a shifting landscape.

Meghan McCarty Carino:  How are you hearing all of this playing into arguments about decentralized finance — the idea that underpins crypto?

Shin: A lot of people are saying that this kind of proves the risks of centralization. The crypto community, especially a lot of entrepreneurs, are doubling down on building the decentralized aspects of the technology or building in a decentralized way. I think a lot of them actually think that all the failures of the different centralized crypto entities in the last year will ultimately be a good thing for what they want to build. I have been seeing that renewed conviction, and I’m waiting to see if they’ll be able to deliver on that promise.

McCarty Carino: When we spoke with you at the end of last year, you said that mainstream interest in crypto might wane in 2023, but that the true believers were excited to get back to basics and developing the tech that underlies these systems. Is this another purifying fire in that landscape?

Shin: That is basically how the crypto community is viewing it. So when you cover this space, there’s certain phrases that you’ll hear over and over again. People in the crypto space view centralized things as what they call single points of failure. So, they’re constantly trying to build things in this decentralized way where there is not a “single point of failure” — basically building resiliency into the system and building things in which you don’t have to trust a certain person or entity that they’ll do a good job. The system is just by nature built with all the checks and balances built in and will function in a way that doesn’t cause those issues.

McCarty Carino: Big picture, how would you describe the effect that the last week has had on the crypto sector?

Shin: I would say that it has definitely caused alarm for a lot of startups, especially for those companies that transact between the two systems. However, I see a lot of them are also tweeting out lists of other companies that are still open to working with crypto companies. So, who knows? Maybe we’ll see more of that. One thing that’s not great about that is one of the reasons that Silvergate was one of the first to fall is simply because a huge percentage of its customer base was in the same industry. And so, for these banks that are now taking a lot of new accounts from different crypto companies, we’ll have to see if their customer base becomes highly concentrated. Hopefully that will not be the case.

Related links: More insight from Meghan McCarty Carino

You can read more of Laura Shin’s coverage of how these bank collapses are affecting crypto in her Unchained newsletter.

In our conversation, Shin mentioned that it looks like federal regulators — whether implicitly or explicitly — are cutting crypto out of the traditional banking system. According to Reuters, New York’s financial regulator said the closure of Signature had “nothing to do with crypto.” In fact, in recent months the bank had worked to diversify its deposits away from crypto companies.

But a long breakdown in Bloomberg suggests its mere association with the volatile crypto industry may have been enough to spook other depositors into making a run on their money after Silicon Valley Bank’s demise.

And the collapse of Silvergate and Signature also has implications for the Justice Department’s ongoing fraud investigation into FTX.

Reuters reports that former FTX customers have filed claims accusing both banks of helping FTX steal and misappropriate their money, with the hope of recouping some of their losses from those banks.

That seems less likely now.

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