There’s no arguing that the recent collapse of the Silicon Valley Bank (SVB), along with Signature and Silvergate banks will be a stumbling block for entrepreneurs who rely on funding from such institutions. While it may have failed to dampen the crypto markets in the short term, some experts think the government’s action against the banks could have a far-reaching impact in the near future.
Danny Talwar, Global Head of Tax at Koinly believes the closure of multiple crypto-friendly banks could seriously harm the sector and innovation in blockchain based technologies, and perhaps set the industry back a decade.
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“In the medium term this will compound with the more crypto-native collapses from the past year, resulting in an extremely difficult environment for innovation to thrive within the USA,” says Talwar.
Strategic move
Stefan Rust, CEO of independent inflation data aggregator Truflation, points to something more sinister.
“Chokepoint 2.0 is in full swing and has concluded by cutting the oxygen supply to crypto, very similar to the way in which sanctions were placed on the Russian economy. The US government is coming to do the same to crypto without necessarily spelling it out,” believes Rust.
In an interview with The Block, Barney Frank, an architect of the US banking regulation, the Dodd-Frank Act, and a member of the Signature Bank board, has said he believes regulators shut down Signature Bank in the aftermath of SVB’s collapse to “send the message that crypto is toxic.”
Even though Emil Åkesson, Founding Partner and Chairman at CLC & Partners, tends to lean more towards Frank’s belief, he says the situation is a little more nuanced.
Åkesson thinks that the closure of Signature Bank could be viewed as a strategic move by regulators to deter other financial institutions from engaging with the crypto industry. By shutting down a prominent crypto-friendly bank, regulators might aim to create a chilling effect, discouraging banks from embracing cryptos and fostering a perception that the crypto industry is inherently risky, argues Åkesson.
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On the other hand, he says it’s also plausible that the closure was driven by genuine concerns for financial stability and investor protection.
While he’s sure the truth lies somewhere in the gray zone, he tends to agree with Frank’s belief. “There has simply been too much skepticism being displayed by the SEC (the US Securities and Exchange Commission) against crypto historically and its place in the financial system to ignore,” says Åkesson.
Time for a change
Harrison Gwinnett, CEO and founder of Unus Labs, isn’t surprised that the financial services industry has suffered another major collapse. He says that despite the 2008 financial crisis exposing the cracks in the system, many organizations and professionals in the industry have chosen to ignore them and accept the status quo.
He thinks the only way to avoid history from repeating itself is by enforcing stricter lending-to-balance-sheet ratios. “But the reality is that policymakers struggle to overhaul financial services as banks hold all the power,” believes Gwinnett.
Building on the thought, Caroline Malcolm, Global Head of Public Policy at Chainalysis argues that the collapse of the banks has some important lessons for everyone involved.
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According to her, the most important takeaway in this entire episode for regulators is that industry concentration in one or a few financial institutions, in the way that SVB’s exposure was concentrated in tech, creates significant unnecessary financial stability risk. She stresses that de-banking crypto businesses would lead to a concentration to fewer financial institutions.
“If regulators continue to put undue pressure on banks when it comes to banking the crypto sector, versus providing clear guidance on how to do so safely drawing on its inherent transparency, then there will be a step backwards in terms of ensuring a resilient financial system,” believes Malcolm.
