Crypto bros are quite literally becoming bankless and unbankable, writes Bloomberg. By abruptly bundling crypto-friendly Signature Bank — one of the last of its kind — into receivership amid an extraordinary weekend operation to backstop the US banking system, regulators are sending a message that volatile tokens and decentralised finance need to be kept far away from TradFi. Given echoes of the global financial crisis and with market jitters spreading around the world, that’s no bad thing.
Regulators have been warning for some time of the myriad crypto risks seeping into the mainstream banking system, comparing them directly to the $1.3 trillion subprime mortgage market that incentivised greed, exploited regulatory arbitrage and eventually led to the 2008 economic meltdown. A first warning shot fired by banking watchdogs in a joint declaration in January, weeks after the epic collapse of FTX battered crypto markets, promised more scrutiny over issues including unstable deposit flows, poor legal compliance, concentration and counterparty risk.
The recent events showed they were right to worry. The first domino to topple, Silvergate Capital Corp., shows some lenders were recklessly chasing growth where bigger rivals feared to tread. Like Signature, it offered a popular on- and off-ramp between fiat and crypto payments, which had accumulated $11.9 billion in digital deposits by September. But those customers ended up being fair-weather friends when the post-FTX meltdown hit and regulatory scrutiny rose, and they yanked their deposits — tipping the bank into liquidation.
Signature might have met the same fate: It too had made a costly expansion in crypto, faced hot water over FTX’s use of its Signet payments ramp, and its exposure to flighty crypto deposits was set to drop by $3 to $5 billion this year. Heading into the weekend, deposits were already flying out the door, according to the New York Times. The swiftness with which regulators stepped in looks like an explicit bid to avoid another crypto-related blow-up — and sends a signal to the crypto industry.