Billions worth of crypto trades at risk as US bank shutdowns take toll

PORTLAND, Oregon – The digital asset market had been coming off of a turbulent year featuring a number of high-profile blow-ups. Now, two shutdowns in the United States banking industry – Silicon Valley Bank (SVB) and Silvergate Capital – have set off a fresh set of stresses.

SVB’s failure triggered a knock-on effect in the crucial market for stablecoins after digital asset giant Circle Internet Financial, one of the biggest issuers of the widely used tokens known for their perceived safety, revealed that it had US$3.3 billion (S$4.5 billion) of reserves with the bank. The news caused Circle’s token, USDC, to slip below its intended one-for-one peg with the US dollar, sending a shock through the market.

As concerning as USDC’s de-peg was, it is the shutdown of crypto-friendly bank Silvergate – and the shuttering of its electronic payments platform, the Silvergate Exchange Network (SEN) – that may resonate even more.

For years in the early evolution of crypto, if an investor wanted to wire money from his bank account to an exchange, it could take days via traditional banking channels – often too late to ride the latest market move. Moving funds between exchanges quickly or on weekends was not possible as banks were closed, while crypto traded 24/7.

The game changer came in 2017 when Silvergate established SEN. The platform allowed users, including hedge funds and crypto exchanges like Coinbase Global, to transfer funds seamlessly and nearly instantaneously at any time of any day.

The network’s presence helped fuel the institutional adoption boom that made the most recent crypto bull market possible. Its shutdown threatens to stifle growth, albeit perhaps temporarily, while new alternatives ramp up.

“It leaves legitimate crypto businesses exposed to a number of risks, like the ability to settle trades with counterparties, pay staff and bills, accept invoice payments,” Mr Oliver von Landsberg-Sadie, co-founder of BCB Group, whose payment network is hoping to pick up SEN’s customers. “A business with no bank account is quickly rendered inoperable, and crypto companies are especially vulnerable to this risk.”

Last year alone, SEN handled US$563.3 billion of US dollar transfers, down from US$787.4 billion during the bull period of 2021 but still impressive. The network had nearly 1,700 customers at its peak in the third quarter of last year, according to Silvergate filings.

Already, SEN’s absence is taking a toll, making trading tougher. Liquidity, or ease of trade, for Bitcoin-to-dollar and Bitcoin-to-Tether transactions on some US exchanges dipped between 35 per cent and 45 per cent from the beginning of March to Saturday, according to research firm Kaiko. Meanwhile, crypto companies have been scouring for alternative banking and payment services.

Options as robust as SEN are far and few between. Silvergate’s one-time rival for digital asset clients, Signature Bank, recently said it was pulling back on deposits related to crypto companies. Under regulatory pressure, other banks are capping their deposits related to crypto companies at 10 per cent to 15 per cent, and may charge fees for having to deal with increased regulatory scrutiny. Without SEN, costs of fiat conversions could increase 20 per cent to 40 per cent, said Mr Richard Crone, chief executive of payment consultant Crone Consulting.

Before USDC’s de-peg, some argued that the shutdown of SEN might push institutions to more aggressively use stablecoins. Once dollars are converted into stablecoins, users can use them for payments on exchanges or on blockchains. Stablecoins carry their own risks, though. As USDC’s travails showed, they still connect to the traditional banking system and can be affected by its failures, and regulators are circling.

“If you have every crypto firm in the US doing this, that puts more pressure on regulators,” Mr Conor Ryder, an analyst at Kaiko.

The New York and federal authorities have already gone after a Binance-branded stablecoin issued by Paxos Trust and known as BUSD, saying it was an unregistered security.

Not only could further regulatory scrutiny of stablecoins – likely to ramp up after USDC’s troubles – restrict their usage, it may also lead digital asset users to revert to using slow, more expensive blockchain networks for over-the-counter token swaps between parties. During busy times for the Ethereum blockchain, for instance, people sometimes spent more money on transaction fees than on the non-fungible tokens they were buying. BLOOMBERG