By Alex Tapscott
The stunning collapse last week of Silicon Valley Bank (SVB) and Silvergate, along with the seizure of Signature bank by regulators Sunday, sent shockwaves through financial markets. The Federal Reserve stepped in to guarantee depositor funds at the defunct banks and to create a much needed window for other banks to easily access liquidity to prevent contagion. We are not out of the woods yet, but things are calmer – for now.
However, the events of the past few days have already had a dramatic, immediate, and potentially long-lasting impact on the digital asset industry in the United States.
Throughout the crisis, SVB has been mostly portrayed as the favorite bank of venture-backed startups and the technology industry more generally. That is true, but it is also one of the most important banks to the digital asset world, providing banking services to many of the largest firms like Circle and Coinbase, and acting as an on/off ramp for many more businesses and countless everyday users. Signature Bank and Silvergate played similar critical roles in the ecosystem.
In a few short and tumultuous days, the U.S. digital asset industry lost its three largest banking partners.
This may be just an unfortunate accident – collateral damage from the broader crisis. After all, the biggest U.S. banks don’t bank the digital asset industry, leaving smaller players to pick up the business. Those firms’ deposits are typically less diversified, and the businesses are not always as well capitalized, making them more vulnerable to shocks.
But some are wondering openly if this is not part of an effort by some of Biden allies, such as Elizabeth Warren to kneecap the industry by removing its banking partners and severing any connection to the fiat-currency denominated world - a so-called “Operation Chokepoint.” Former Congressman Barney Frank, until recently a member of Signature’s board of directors, threw fuel on the fire saying “I think part of what happened was that regulators wanted to send a very strong anti-crypto message. We became the poster boy because there was no insolvency based on the fundamentals.”1 Frank may know something we don’t and be alluding to a behind the scenes effort by lawmakers and regulators to try and crush a nascent industry - or he may be trying to deflect blame for the collapse of a bank on his watch. The truth will reveal itself in the goodness of time.
By now you might be asking, “Why does the digital asset industry need banks?” After all, Bicoin began as a movement about decentralization, creating an alternative to the central bank system that allowed anyone anywhere in the world to “Be their own bank.” DeFi promises users the benefits of finance without intermediaries. Yes, self-custody is one of the superpowers of digital assets and DeFi is accessible to anyone anywhere with or without a bank account. However, in the dollar-dominated world, almost all economic activity happens “off-chain” outside of crypto. The migration of trillions of dollars of assets to blockchain platforms is one of the great economic opportunities of our era, something Coinbase, Circle and others were quick to seize on. But to get money and other assets to the on-chain superhighway, we need an on-ramp from the country roads of legacy banking.
What happens now? Well, for starters, there is a business opportunity to pick up the business Silvergate and others were doing. In a free market, that shouldn’t take long. Perhaps this is an opening for bigger banks to do more on the frontier of finance: BNY Mellon is building a custody offering and others like J.P. Morgan are experimenting in Web3.
If this truly is an industry-wide ‘crackdown,’ then I fully expect many businesses and would-be-entrepreneurs will just leave the U.S. altogether for greener pastures off-shore. Abu Dhabi has just launched a $2 billion fund to attract Web3 talent. As one government closes a door, others open windows. This would be a drastic, short-sighted, and self-defeating move by the government – ceding its leadership as the innovation engine of the digital economy and the global financial services leader.
I suspect that concerns of a government conspiracy to kill crypto are vastly overblown. There are dozens of lawmakers on both sides of the aisle who have eagerly embraced this industry and recognize its transformational potential. When the dust settles from this crisis, hopefully they can work with responsible industry leaders to guide us back to the path of sustainable innovation.
1https://www.cnbc.com/2023/03/13/signature-bank-third-biggest-bank-failure-in-us-history.html
