2023 has seen the relationship between banks and crypto firms slip further apart. Previous key events including the collapse of FTX, Three Arrows Capital, and the Terra Luna crash have reignited calls to self-custody crypto, claiming that some exchanges could not be trusted. Banks appear to be battling their own issues while attempting to distance themselves from crypto businesses.

What followed was a gradual reduction in banking support for crypto firms, which, together with monetary policy tightening, fueled the narrative that the banking system could not be trusted and that investors could adopt crypto as an alternative monetary system.

One of the most prominent proponents of this narrative in recent weeks has been former Coinbase executive Balaji Srinivasan.

Recently, In a Twitter thread, Srinivasan predicted that Bitcoin would reach $1 million by June 17, 2023, more than a 3,000% increase over the current price. 

More broadly speaking, though, millennials are seen as torch-bearers of a “debanked” future, according to a recent Bankless report, which found that most of the demographic believes that Bitcoin will go mainstream in the coming years. Many had their views of financial institutions impacted by the 2008 financial crisis.

However, banks offer a crucial link to the fiat money system. Without them, most retail crypto traders could not easily acquire crypto and participate in decentralized finance protocols.

A case in point 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 Silvergate Exchange Network. The payment rail allowed traders to exchange between crypto and fiat if they and the exchange they were trading on banked with Silvergate.

However, without this crucial lifeline, crypto firms would have difficulty enabling retail trading in their early days.

The co-founder of failed exchange FTX, Sam Bankman-Fried, said he could not overstate the role Silvergate played in the success of crypto exchanges.

“Life as a crypto firm can be divided up into before Silvergate and after Silvergate,” the indicted former CEO wrote on Silvergate’s website. Further adding:

“It’s hard to overstate how much it revolutionized banking for blockchain companies.”

Even stablecoins pegged to the value of government-issued currencies recently proved that they depended on banks.

Investors rely on stablecoins to provide on-ramps and off-ramps into the crypto ecosystem. An investor can use stablecoins to buy and sell other cryptocurrencies quicker than with fiat. Issuers of stablecoins backed them with reserves of on- or off-chain assets. Popular off-chain reserve assets include U.S. Treasuries and cash.

USDC issuer Circle recently had to calm investors who redeemed over $1 billion of the stablecoin after a bank run on Silicon Valley Bank. Circle held 25% of the reserves backing USDC at SVB. In an announcement released on Twitter, Circle stated that only 25% of its USDC reserves that are held in cash were stored with banks.

Circle added that SVB was one of six banking partners that the company used. Furthermore, operations were not affected, with the announcement adding:

“While we await clarity on how the FDIC receivership of SVB will impact its depositors, Circle & USDC continue to operate normally.”

At 10:50 p.m. ET on March 10, 2023, Circle said it could not withdraw about $3.3 billion in reserves from the bank. According to the announcement, SVB had not processed the transfers Circle initiated on Thursday. On the same day, federal regulators took control of the bank.

Around the same time, Coinbase said the exchange would stop processing USDC to USD conversions. During periods of high transaction volume, the conversions depended on dollar transfers from banks that cleared during normal working hours.

While incumbents like Coinbase and Circle seem to secure alternate banking partners relatively easily, crypto startups have recently struggled in this area. Stringent onboarding requirements mean that these firms face cumbersome paperwork or flat-out refusals.

After the collapses of Silvergate, SVB, and Signature Bank, smaller institutions perform stricter due diligence. Since this new approach, users have experienced longer waiting times for approvals. The banks want to avoid being the target of U.S. regulators for introducing systemic risk into the financial system.

However, attracting deposits could boost banks’ balance sheets and restore confidence in the banking system. Non-crypto native banks also have the advantage of catering to a broader range of industries. This diversified exposure will reduce their liquidity risk should a crisis occur in a specific industry, leading to mass withdrawals.

Puerto Rico-based FV Bank’s CEO recently said they would provide solutions to firms that adhere to “strict compliance and risk requirements.”  

For Be[In]Crypto’s latest Bitcoin (BTC) analysis, click here.

The post Analyzing The Toxic Relationship Between Crypto and Banks appeared first on BeInCrypto.

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