Is the US crypto industry now threatened with the end?

It’s a thunderbolt. The US crypto industry loses two of its most important pillars in just one week. Only last Wednesday did the crypto-friendly Silvergate Bank close. Now follows the Signature Bank. Last Sunday, March 12, 2023, she announced her bankruptcy. The consequences for the crypto ecosystem in the US are dramatic.

“The crypto industry has basically been removed from the banking sector, especially for quick 24/7 payments,” economics professor Austin Campbell told Bloomberg. Silvergate and Signature were key banks, a central bridge between the crypto and fiat systems.

1,600 crypto companies trusted Silvergate for fast crypto-to-US dollar exchanges. According to its own statements, Signature already had over 800 crypto customers in 2021, most recently including Coinbase, Paxos and Circle. In the fourth quarter of 2022 alone, the trading volume of crypto transactions there was $275 billion, compared to $117 billion at Silvergate. The payments were processed via a private blockchain, the Signet.

Signet: Signature used a special system

Signet allowed the fast transfer of crypto to fiat, 24/7. Companies had to go through an investigation process to gain access to the system. He should keep dubious customers away. It didn’t quite work: Signet users included the collapsed crypto exchange FTX and its hedge fund Alameda Research, as well as Justin Sun’s critically suspected stablecoin True USD. According to Dirty Bubble Media, further monitoring of activities was missing after verification:

It’s like a basement nightclub. Once you get past the bouncer outside, you can party however you want. The drinks are free, the ceilings are mirrored, all your friends are there, and best of all, no one is watching.

Dirty Bubble Media

Without Silvergate and Signet’s fiat gateways, many companies’ business models are at risk. Both handled a “lion’s share of fiat settlement of bitcoin trades” in the US, said the CEO of TBD at Block, Mike Brock, in a post on social media app Damus. According to research institute Kaiko, the transaction volume between Bitcoin and the US dollar and the stablecoin Tether on some US crypto exchanges has already fallen as much as 45 percent this month. The Signature crash is likely to exacerbate the problem.

Users may soon face difficulties exchanging their cryptocurrencies and US dollars. There is hardly any improvement in sight: US regulators have been explicitly and repeatedly warning traditional banks against doing business with crypto companies for weeks. They isolate the industry from the financial sector.

Silver lining on the horizon

“These warnings make it difficult for the largest banks to serve the crypto industry. The opportunity is not worth the regulatory risk.” analyst Jaret Seiberg told CNBC. “This results in a consolidation of crypto exposure to a handful of smaller banks, which means greater liquidity risk and greater concentration risk. This creates the very risks that bank regulators are trying to combat.” Many critics speak of Operation Chokepoint 2.0 when the US authorities act; a targeted government strategy to slowly dry up the crypto sector – just like the gambling and porn industries once did.

According to economics professor Austin Campbell, the most likely solution now is to switch to “other jurisdictions.” A new haven for the industry is emerging in Hong Kong. The city opens up to crypto with new laws. Another silver lining on the horizon: The crypto exchange Kraken wants to start building its own crypto bank in Wyoming.