The relationship between banks and crypto companies continues to unravel following key market events. Banks are now more cautious when incorporating cryptocurrency companies, amid an environment that generates little trust.
Banks and crypto companies have been separating this year 2023, from events such as the collapse of FTX, Three Arrows Capital, and the Terra Luna accident. Likewise, banks seem to be fighting their own problems, as they try to distance themselves from crypto companies.
The truth is that there is a gradual reduction in bank support for crypto companies, which, along with the tightening of monetary policy, fed the narrative that the banking system could not be trusted and that investors could adopt crypto as an alternative monetary system.
Banks as a Crucial Link to the Fiat Money System
The idea of adopting crypto as an alternative monetary system has been highlighted and supported by former Coinbase executive Balaji Srinivasan. In a tweet, the executive predicted that Bitcoin would reach $1 million by June 17, 2023, an increase of more than 3,000% over the current price.
There is a whole generation of millennials, who are seen as torchbearers of an “unbanked” future, according to a recent report by Bankless. In the said report, it is explained that most demographic groups believe that Bitcoin will go mainstream in the next few years. This point of view was reinforced after the financial crisis in 2008.
Notwithstanding the foregoing, there is no doubt that banks provide a crucial link to the fiat money system, as without them most retail cryptocurrency traders would not be able to easily acquire cryptocurrency or participate in decentralized financial protocols.
One such example is Silvergate Bank, which filed for voluntary liquidation on March 8, 2023. The bank allowed traders to convert between fiat and crypto 24/7 using its exchange network, Silvergate.
Failed exchange FTX co-founder Sam Bankman-Fried said he could not overstate the role Silvergate played in the success of crypto exchanges.
“Life as a cryptocurrency company can be divided into pre-Silvergate and post-Silvergate,” the accused former CEO wrote on the Silvergate website. He further added that “It is hard to overstate how much banking has revolutionized for Blockchain companies.”
Even stablecoins pegged to the value of government-issued coins recently demonstrated that they were dependent on banks.
Banks and Crypto Could Make Business Profitable
After the collapses of Silvergate, SVB, and Signature Bank, stricter due diligence is being carried out by smaller institutions. Since this new approach, users have experienced longer wait times for approvals.
Banks want to avoid being targeted by US regulators for introducing systemic risk into the financial system. Attracting deposits, on the other hand, could boost bank balance sheets, as well as restore confidence in the banking system.
Non-crypto native banks also have the advantage of serving a broader range of industries. This diversified exposure will reduce the investors’ liquidity risk should a crisis occur in a specific industry, leading to massive withdrawals.
By Audy Castaneda
