A New York City sewer wave recently swept the crypto industry, and it’s no secret that the flood began beneath 33 Liberty Street. But now the foul odor has spread well beyond the financial district, revealing mismanagement and incompetence which riddles the US government and traditional finance (TradFi) banks, at least where the economy is concerned.
Almost two months later, the purpose and outcome of the sewage splash are still under question. Did financial regulators really try to de-bank the US crypto industry? How successful was the stunt, and what were they trying to achieve?
What is now dubbed Operation Chokepoint 2.0 is certainly setting back the US crypto industry, but not more than (and more so because of) the erratic attempts at regulating the industry without having provided an educated and comprehensive regulatory framework.
This is the final installment of a three-part series examining the tale of three crypto-friendly banks, the convoluted events of the days which followed, the outcomes, and what this means for the regular person, and for the future of crypto.
Crypto-focused Silvergate Capital announced on Wednesday, March 8, that it would voluntarily cease operations and proceed with liquidation. The decision was attributed to a decrease in the value of their shares and the inability to recover from the collapse of FTX, one of Silvergate’s major clients.
Two days later, on March 10, regulators shut down Silicon Valley Bank (SVB), and the Federal Deposit Insurance Corporation (FDIC) assumed control over the bank and its proceedings. This action was prompted by a substantial influx of withdrawal requests amounting to $42 billion, which SVB was unable to fulfill due to a lack of necessary liquid funds.
Another two days later, on March 12, federal regulators shut down Signature Bank in New York. The decision was based on a “fear of continued contagion,” as explained in a joint statement issued by the US Treasury, Federal Reserve, and FDIC. The bank did not have any insolvency issues.
Amidst updates on the crackdown on crypto-banking, First Republic Bank and Credit Suisse also experienced their own failures. Meanwhile, despite the contradictory regulatory proposals in the US, Bitcoin continued to experience steady price growth.
Ironically, these events brought the public’s attention to the risks of fractional reserve banking, a system where only a fraction of bank deposits is required to be available for withdrawal. Why is this ironic? Because blockchain technology (Bitcoin) was created to avoid these risks.
While an unprecedented amount of money is being loaned to banks and the Securities and Exchange Commission (SEC) is busier than ever, the questions remain: do these events indicate an imminent financial crisis, and is it enough for the complacent crowd to stop sucking it up and turn to something less politically-reliant.
Even the government is divided on crypto. Liberal democrats reveal themselves to be majorly fiscally-conservative, while tradition-conserving republicans equate the right to own crypto to free speech. With various bills proposed from almost every state and governor, the procrastinated-on regulatory framework is sizzlingly overdue. At a time when the mismanaged TradFi industry is acting especially feverish, will irreparable trust in the established may make way for something of surprising stability and possibility?
In the gaping hole left by the closure of Silvergate, collapse of SVB, and the shutdown of Signature Bank by regulators, the soil is ripe for planting seeds or putting down a strong foundation.
JPMorgan MD of Global Market Strategy, Nikolaos Panigirtzoglou, believes that those seeds will be of the stablecoin kind, but it seems unlikely that anyone will be putting their money into anything US dollar or pegged to it.
Panigirtzoglou is right about the banking crisis presenting an opportunity for some exchanges which could “gain market share by offering banking services to crypto-native firms and investors”.
Replacing the severed banking networks which permitted for an efficient purchase of crypto with fiat currencies remains a necessity for US natives and US-based firms. If on and offramp transactions become impossible or more difficult in the US, participants of America’s crypto market may have no choice but to relocate to places with better climate, in more than just the political sense.
So, what’s next?
What are the options?
Instead of stablecoins, Bitcoin has once again emerged as a safe haven from the turmoil of traditional finance.
According to a research report from Bernstein, the mining industry is in a favorable position to participate in a new cycle of Bitcoin (BTC). The report highlights BTC’s status as a safe haven, the upcoming reward halving in early 2024, and reduced energy and equipment costs.
This positive trend is projected to lead to improved gross margins in 2023. And proposed bills protecting the rights of miners and Bitcoin owners would bode well for the financial futures of the US public, provided they can leverage this opportunity.
Looking ahead, the next significant catalyst for miners, according to the report, is the halving event. Approximately every four years, the total number of Bitcoins that miners can potentially earn is halved. This reduction in supply increases scarcity, leading to price appreciation. Consequently, more miners join the network, resulting in higher hashrate and improved network security.
If the 2024 halving follows the pattern of previous ones, the BTC mining industry would experience lower competition due to the sector’s struggles during the bear market of 2022. Combined with higher Bitcoin prices, this would result in improved profitability before additional mining capacity comes online, reducing competitive intensity, as outlined in the report.
Since more and more big crypto players are being dragged into beef with the US Securities and Exchange Commission (SEC) and its sister branches, everyone who’s anyone will be too preoccupied to focus on rebuilding on and off ramp networks (let alone enhancing them). But what if there was a clear and fair regulatory framework to abide by? While the US crypto industry can only dream, the SEC thinks it already exists.
On March 29, Chairman of the US SEC, Gary Gensler, stated that rules for the cryptocurrency market already exist but the industry is still “rife with noncompliance”. Gensler reaffirmed his belief that the majority of coins and tokens in the crypto space should be classified as securities during his testimony at the House Appropriations Subcommittee on Financial Services and General Government.
During the hearing, Congressman Sanford Bishop inquired about the SEC’s plans to issue regulations that clarify the application of securities laws to digital assets, echoing a long-standing demand from the crypto industry for regulatory clarity. Gensler, sticking to his position, emphasized that the rules governing crypto were already crystal clear.
“The regulations already exist, sir. They are called securities regulations, and there are disclosure regulations when someone attempts to raise money from the public,” stated the SEC chairman.
The SEC has adopted what industry observers describe as a “regulation by enforcement” approach towards crypto, cracking down on companies and projects that engage in activities the regulator considers to involve unregistered securities.
And while to Gensler the crypto market resembles “the Wild West”, stuffing regulation which was designed perhaps before most crypto users were born, let alone before Bitcoin’s creation, seems unfair and uneducated, instead of a way to “safeguard consumers”.
As long as the US continues to stubbornly procrastinate on proper regulation, they continue falling behind countries most US citizens consider third world and wouldn’t be able to point to on a map. What would happen to the US if a lucrative and innovative financial market were to completely abandon the country, for somewhere warm and promising like the Bahamas — where a regulatory response to the FTX implosion has already been proposed to the public? Is the US ready to be left in the dust?
3. The rest of the world
Coinbase prepares to launch an offshore exchange, having obtained a license from the Bermuda Monetary Authority. Binance has been forced to call off a $1.3 billion deal for Voyager’s assets — Binance intended to help creditors of the bankrupt crypto brokerage company — citing hostility and uncertainty of the US regulatory climate. In fact, Binance has already reapplied for a license to offer crypto services in Singapore.
Singapore is just one among the growing list of nations embracing digital currencies and decentralized finance, including El Salvador, Georgia, Hong Kong, Portugal, Switzerland, the UAE and many more.
Meanwhile, the European Parliament has passed two key laws for crypto services providers, issuers, and users across the EU. And while the second part of the laws — the Transfer of Funds regulation, requires crypto operators to identify their customers and report suspicious transactions (something the AML and KYC already do), clarity and a lack of obstinance towards crypto’s becoming a permanent fixture globally is much welcome.
Is there a future for crypto in the US? This may not be the correct way to put it because in light of recent events, from banks crumbling and loans being doled out for their rescue to grocery prices, a more appropriate question would be whether there is a future for the US without crypto?
As a last-ditch effort, Coinbase has filed a lawsuit against the SEC, seeking the commission’s provision of clear regulation. The challenge is, members of the US SEC are reluctant to create this framework, or lack the necessary understanding of cryptocurrency and blockchain technology to put anything adequate together.
Returning to the question of Signature Bank’s closure, which happened concurrently with efforts to resuscitate First Republic Bank — and efforts were made not only by the Federal Reserve, but also by several large bank, who deposited around $30 billion into First Republic — why couldn’t a sliver of the effort be extended for Signature? Regulators cited “losing faith in the bank”, but that isn’t a quantifiable reason. Regulators mentioned “preventive measures” but did not exercise the same measures on First Republic.
What else is needed to show that the safeguardings and protections and lifelines are extended only to a small circle where benefits can never trickle down to the common person?
When crypto was criticized as a means of funding terrorism, the alternative, which has always been the funding resource for terrorism, was fiat. Now that the industry begs for regulations to abide by, and is repeatedly denied, at the same time as more crypto companies are getting sued and ‘cracked down’ upon, the ‘regulatory noncompliance’ and ‘terrorism funding’ are obviously not a real concern for the US government.
The real concern is money with value that is not reliant on a government, which is governed by mathematics and technology, which is available equally to every person, regardless of status and ancestry. And if a government only holds power through dictating the value of money and what the public can and cannot do with it, the qualities permitting that government power should be heavily questioned and scrutinized. Until then, the only compliance is of an exhausted, wage-dependent public, with the unfair and outdated laws of the free world.
This concludes the three-part breakdown of the Silvergate-Silicon Valley Bank-Signature story.