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Crypto Banking is in a Mess. Where to from here?

Coindesk | Frances Coppola | Mar 2, 2023

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Crypto banking is in a mess

  • The collapse of the FTX exchange caused damaging runs on two U.S. regulated banks. One of them – Silvergate Capital Corp. – had to sell assets at a loss to repay depositors and lenders, and as a result has now warned that it may not be able to continue as a “going concern.”
  • A third bank had to issue an emergency warning that those who had deposited fiat funds with its customer Voyager Digital did not have deposit insurance.
  • U.S. regulators are pressuring banks to withdraw banking services for crypto platforms and exchanges. And in a decision that sent shock waves across the crypto world, the U.S. Federal Reserve rejected a membership application from Custodia Bank, a full-reserve bank providing payment and custody services to crypto businesses.
    • The regulatory clampdown on crypto banking began in earnest on Jan 3, when the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Controller of the Currency (OCC) issued a joint statement on crypto-asset risks to banking organizations.
    • The message is clear. U.S. regulators think crypto is a serious threat to the traditional financial system. Not because it is going to take it over, but because it could bring it down.

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  • So crypto companies want a type of bank we don’t currently have: a “full-reserve” bank.  In 2019, Wyoming created a charter for full-reserve banks. Its “special purpose depository institution” can receive deposits and provide asset management, custody and related services, but is not allowed to lend (though it can purchase certain types of debt securities) and must maintain unencumbered liquid assets of at least 100% of its total deposits.
    • If crypto companies stopped fighting the regulators and cleaned up their act, the Fed might look more favorably on banks providing services to them.
    • The reason why we don’t have full-reserve banks is that they are intrinsically less profitable than their fractional-reserve competitors. Historically, full-reserve banking has never lasted for long: Banks either find ways of leveraging customer deposits or they are bought by a fractional reserve bank or they go out of business.

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