In recent news, First Citizens Bank has agreed to purchase most of what remains of Silicon Valley Bank. Despite SVB’s reputation for serving the tech community and venture capitalists, First Citizens made a point to exclude crypto-backed loans from the deal.
This aversion to digital assets is not unique to First Citizens, as New York Community Bank also refused to acquire Signature’s digital banking arm following its failure.
What’s more, the US Federal Deposit Insurance Corporation is currently in the process of returning $4bn in deposits directly to those customers.
These actions highlight the cautious approach that many traditional financial institutions are taking toward digital assets in today’s rapidly evolving banking landscape.
Regulatory Hostility is Rapidly Increasing
According to a former US Congressman, who served on Signature’s board, traditional banks’ aversion to crypto may be driven by growing regulatory hostility towards digital assets, particularly following the implosion of FTX last November.
Frank even went so far as to suggest that concerns about crypto played a role in what he viewed as a rushed government takeover of Signature.
Supporters of bitcoin and other digital assets tend to agree with him. Conversations on online forums and social media are rife with speculation about what they view as a coordinated effort by the US government to ban crypto outright.
Dubbed “operation chokepoint 2.0”, this theory links the collapses of Signature and Silvergate, another smaller lender with significant digital assets business, to a series of regulatory crackdowns.
These events have sparked concern among crypto enthusiasts who fear that such moves could stifle innovation and prevent them from accessing the benefits of digital currencies.
However, it remains to be seen how this regulatory landscape will evolve in the coming months and years, and how banks will navigate the risks and opportunities of the rapidly changing financial landscape.
Despite regulatory assertions that they are simply attempting to maintain stability and prevent money laundering and other illicit activities, banks like Signature have faced significant consequences in the wake of crypto-related events.
While the New York Department of Financial Services denied that Signature’s shutdown was related to cryptocurrency, the bank still experienced a 20% loss in total deposits in the hours following SVB’s collapse.
In a recent speech on the subject of crypto, Michael Barr, the US Federal Reserve’s Vice-Chair, acknowledged the potential for digital assets to transform the financial system.
However, he emphasized the importance of having the appropriate safeguards in place to maximize the benefits of innovation.
Plenty of Uncertainty Regarding Crypto’s Regulatory Situation
While both sides of the debate have valid points, the regulatory landscape surrounding digital assets remains uncertain.
As financial institutions and policymakers grapple with the implications of digital currencies, it is important to consider both the risks and the potential rewards of this rapidly evolving landscape.
FTX was once considered to be a responsible player in the crypto industry. However, the recent scandal revealed that the company was lacking in basic financial controls, resulting in the alleged plundering of millions of customers’ assets by its executives.
As a consequence, the scandal and falling crypto prices undermined Silvergate, with depositors pulling out $8bn in the fourth quarter, leading to the bank being forced to sell securities at a steep loss and ultimately liquidation.
In response to these events, US watchdogs have been quick to clamp down. The Federal Reserve and other regulators have officially warned banks to exercise caution when working with crypto companies, citing.
Enforcement cases are now piling up, with the US-listed crypto exchange Coinbase being warned of potential securities violations.
Additionally, the Commodity Futures Trading Commission has filed a lawsuit against Binance, alleging that the exchange illegally permits Americans to trade crypto derivatives and facilitates illegal activities.
Some of the exchange’s customers have been accused of using the platform for criminal activities, with the chief compliance officer of the watchdog quoted as stating that they are in it for the crime.
As the regulatory landscape surrounding cryptocurrencies continues to shift rapidly, investors and industry participants must make sure that they are informed of the latest developments and take the right precautions to minimize risks.
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