The digital-asset market is coming off of a turbulent year featuring a number of high-profile blowups. Now, three shutdowns in the banking industry - SVB Financial Group's Silicon Valley Bank, Silvergate Capital Corp. and Signature Bank - 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 Corp., one of the biggest issuers of the widely used tokens known for their perceived safety, revealed it had $3.3 billion of reserves with the bank. The news caused Circle's token, USD Coin, to slip below its intended 1-for-1 peg with the dollar, sending a shock through the market.
On Sunday, regulators in New York closed Signature Bank. As of March 8, the bank still held $16.5 billion in crypto-related deposits. "All depositors of this institution will be made whole," the regulators said. Against this backdrop, it is still the shutdown of crypto-friendly bank Silvergate - and the shuttering of its electronic payments platform, the Silvergate Exchange Network - that is most weighing on the market.
Problem moving funds
For years in the early evolution of crypto, over-the-counter trading desks, hedge funds and other investors that wanted to dabble in crypto had to go through costly, lengthy and clunky contortions just to move funds between digital assets and banks, because the two types of infrastructure weren't connected. If an investor wanted to wire money from their 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 wasn't possible, as banks were closed while crypto trades 24/7.
The game-changer came in 2017 when Silvergate established the Silvergate Exchange Network, known as SEN. The platform allowed users including hedge funds and crypto firms like Coinbase Global Inc. to transfer funds seamlessly and nearly instantaneously, at any time of any day. That let trading firms get in and out of the volatile crypto market faster, cheaper - SEN's use was free - and with less risk.
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," Oliver von Landsberg-Sadie, co-founder of BCB Group, whose payment network is hoping to pick up SEN's customers, said in an interview. "A business with no bank account is quickly rendered inoperable, and crypto companies are especially vulnerable to this risk."
Last year alone, SEN handled $563.3 billion of US dollar transfers, down from $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, per 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 has 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.
"I wake up, in my inbox, the first messages I see are from organizations that are looking for alternatives," said Daryn Barney, founder of Role Fintech Partners, a company that helps crypto firms connect with banks.
Options as robust as SEN are far and few between. Signature ran SEN's main US competitor, Signet, which let companies exchange payments in real time. Signature had said earlier in the year 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 Richard Crone, CEO of payment consultant Crone Consulting.
Some alternatives are emerging. Crypto trust companies, already holding customer digital assets and enjoying relationships with banks, are mulling entering the fray, and providing SEN-like functionality. BCB Group, which operates Blinc, a SEN-like payment network for crypto companies that's popular in Europe, is hoping to launch with three or four banks in the US soon, von Landsberg-Sadie said.
In the past week, BCB has received more than 60 inquiries and is onboarding new customers, according to von Landsberg-Sadie. Next week, it plans to roll out dollar payment functionality to its first half a dozen clients, he said.
While some of these alternative networks may rely on a diverse slate of banks for support, some of these alternative networks may not have as many clients as SEN, and smaller exchanges and over-the-counter desks may "struggle to compete without access to the same liquidity and resources as they had before," Crone said.
Before USD Coin's depeg, 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 USD Coin's travails showed, they still connect to the traditional banking system, and can be affected by its failures. And regulators are circling.
"It's less secure, you are trusting these stablecoin issuers, this opaque operation Tether," Conor Ryder, an analyst at Kaiko, said in an interview. "If you have every crypto firm in the US doing this "- that puts more pressure on regulators." New York and federal authorities have already gone after a Binance-branded stablecoin issued by Paxos Trust Co. and known as BUSD, saying it was an unregistered security. Tethers are issued by a private overseas firm that had settled with the New York Attorney General and been fined by the Commodity Futures Trading Commission.
Not only could further regulatory scrutiny of stablecoins - likely to ramp up after the USD Coin'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 nonfungible tokens they were buying.
"It's a little bit more complex, you have to be more operationally solid," Cory Klippsten, CEO of automated Bitcoin savings plans provider Swan Bitcoin, said in an interview. "It creates a little bit more cost for everyone."