For years, crypto companies have suffered from the inability to establish and maintain banking relationships — a situation that amounts to a general lack of regulatory clarity. Today, US and EU banks are under increasing pressure to stay out of the cryptocurrency industry. While this may sound positive for a movement that wants to build a parallel financial system linked to code rather than human intervention, the return of non-bank access would be devastating for many crypto companies.
But this is an impossible scenario. Instead, more banks - with higher profiles - are likely to be willing to partner with crypto companies in the coming years. Better policies will be put in place, and established crypto companies that survive or start in bear markets will have to follow stricter rules and be subject to stricter regulations. This prediction is based in part on hype and some background conversations with unregistered bankers who say cryptocurrencies are still a growing business. As bleak as things may seem, it is important to note that Bitcoin has not yet reached zero and much of the industry is more than resilient.
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In other words, cryptocurrencies are not going away, and the longer they stay that way, the more likely banks will see them as a growth area again. But compliance is critical for banks, and there are a number of laws making their way through federal and state legislatures that could impose strict requirements on banks and their cryptocurrency customers. There are a number of organizations, such as cryptocurrency exchange Coinbase and stablecoin issuer Circle, that actually operate more like fintechs than crypto anarchists. The "form factor" will try to sell banking services.
Regulated blockchain products and the companies that make them will not make banking difficult, they will improve an outdated financial business.
All of this goes against the trend of cryptocurrency-backed banks exiting the industry. Some of these relatively small institutions in the region see digital assets as a growth opportunity, and in short, have been hit hard by the market downturn. The Metropolitan Commercial Bank, which owns 6% of crypto-branded deposits, will terminate its relationship with cryptocurrency clients at the end of the year, citing “recent developments” and regulatory changes. The incomplete signing had the opposite effect - including the recently introduced restrictions on transactions with the Binance exchange.
Crypto banking franchises Signature and rival Silvergate have seen cryptocurrency-related deposits drop sharply. This is partly because they provide payment corridors between two companies (Signet and Silvergate Exchange Network, respectively) that facilitate the exchange of hundreds of billions of transfers between crypto clients. Both companies lost a staggering sum last year draining cryptocurrency customers and have since borrowed from the Federal Reserve (FHLB), an agency formed during the Great Depression to support the mortgage industry. (Turns out there is an eventual buyer of cryptocurrency, the US taxpayer.)
However, the worst was not over yet. Silvergate, a much smaller bank with relatively broader digital currency exposure, may have played a role in the recent crash of FTX. Last quarter, it sold assets at deep discounts to pay out $8 billion to clients, losing more than ever in cryptocurrency since entering the industry in 2014. This could be a major deterrent for all other banks looking to consider cryptocurrency. Especially since some high-profile clients — Voyager Digital, Celsius Network, and BlockFi — have gone bankrupt and filed for bankruptcy.
Meanwhile, earlier this month, three US government agencies issued letters urging banks to stop doing business with cryptocurrencies. In a joint statement on Jan. 3, the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) said issuing or storing cryptocurrencies connected to decentralized public networks, is "highly likely" to interfere with banking practices.
“It is important that risks associated with the crypto-asset sector that cannot be mitigated or controlled are not transferred to the banking system,” the letter said. In addition, the European Parliament's Committee on Economic and Monetary Affairs wants to limit the number of unauthorized cryptocurrency providers, a measure aimed at preventing problems in the digital asset industry from spilling over into the broader financial system. .
A leaked version of the bill, which has yet to be approved by the EU's Governing Council, would require banks to hold a fiat equivalent amount for every euro they hold in cryptocurrency, CoinDesk's Jack Schickler reports. As tedious as this may sound, it is a far cry from the collateral requirements used by blockchain-based lenders like Maker, who better deal with cryptocurrency pollution.
All this is easy to explain: it will be difficult for banks to deal with cryptocurrency. Regulators have shattered the alleged isolation of traditional finance from cryptocurrency pollution. “This is why I warned about the dangers of letting cryptocurrency mix with the banking system… Under no circumstances should taxpayers take the bag for the collapse of the crypto industry – fraud and money laundering,” Sen. Elizabeth Warren (D-Massachusetts) said of FHLB loans. The illicit financing market.
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Crucially, however, a comprehensive banking ban was not proposed that ran counter to commitments to free markets and the regulator's goal of encouraging capital accumulation. While most cryptocurrency users buy cryptocurrencies with fiat issuance and plan to get rid of dollars in their pockets, crypto companies need banks. In addition, banks require deposits.
The hope is that the industry will change enough for the headlines and the reputational risks Warren mentioned to be a thing of the past. Crypto has learned to embrace new ways of self-expression and it will be changed forever by increased government scrutiny and regulation. Regulation is a filter - it can filter out products with clear demand, such as lending platforms, but it can also prevent the next Gemini Genesis craze. But by definition, whatever happens becomes banking, even if it's crypto in name only.
This story originally appeared on Coindesk