red 
Last month, a series of failures shook the foundations of the banking sector in the United States. Starting with the voluntary liquidation of Silvergate Bank on March 8, a race for the Silicon Valley bank (SVB) quickly followed due to concerns about its stability and excessive exposure to a decline in the value of long-term bonds. As a result, the bank could not cover the deposits that its clients requested just two days later.
The federal response to bank failures
In an extraordinary confidence-building step, the U.S. Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) issued a joint statement on March 12 stating that the FDIC will fully protect all SVB depositors without using tax revenue. obligee – effectively acting as a protection mechanism for the bank.
The New York Department of Financial Services (NYDFS) announced on the same day that it had taken possession of Signature Bank to protect depositors and appointed the FDIC as receiver. In a clearly coordinated move to avoid further bank robberies, the Federal Reserve also announced it would expand funding to US financial institutions to ensure they have enough liquidity to meet the needs of their depositors.
While aggressive moves by U.S. banking supervisors prevented further contagion of the broader financial system, crypto skeptics were quick to point out that the three banks had one thing in common: They all had exposure to cryptocurrencies in one way or another, among the small number of U.S. banks that provided services to the digital assets sector.
Indeed, two earlier actions by the Federal Reserve, the FDIC, and the Office of the Comptroller of the Currency (OCC) seem almost prescient in light of these events. On January 3, three federal banking supervisors issued a joint statement on the risks of cryptoassets to banking organizations due to significant volatility and vulnerability in the crypto sector, possibly alluding to events such as the FTX collapse occurring in 2022.
A month later, on February 23, they issued a joint statement identifying the liquidity risks posed by certain funding sources from the crypto sector to banking organizations and some effective risk management practices.
Crypto exposure is not to blame
It would be too simplistic to attribute these bank failures to their exposure to crypto clients. Rather, they were caused by poor risk management that made them vulnerable to rising interest rates that threatened the value of their long-term holdings – like government bonds – at a time of falling deposits and increasing withdrawals.
Federal banking supervisors realized how their statements could be misinterpreted and were careful to manage the very real consequences of de-risking that could result in the debanking of the crypto sector. In a January statement, they clarified that banking organizations “are not prohibited or discouraged from providing banking services to customers of any particular class or type, as permitted by law or regulation” – a point reiterated in February.
Nonetheless, the reverberations continued to be felt around the world as other regulators began to scrutinize their banks’ exposure to the crypto sector and take various steps to manage risks to financial stability. On March 21, it was announced that the Australian Prudential Regulation Authority (APRA) began requiring banks to report their exposure to start-ups and crypto firms, and to improve their reporting of crypto assets.
A week later, media reports claimed that the Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC) would organize a meeting on April 28 between crypto firms and banks to “facilitate direct dialogue [and] to share practical experiences and perspectives in opening and managing bank accounts”.
Elsewhere, it was reported on April 6 that the Monetary Authority of Singapore (MAS) and the Singapore Police Force are part of a task force led by Singapore banks to fine-tune their approach to account opening checks for crypto firms. The industry-led initiative has been underway for the past six months, and a report identifying best practices in areas such as due diligence and risk management could be published within the next two months.
People see what they want to see
Crypto bulls were quick to hail these developments as positive signs that Asia Pacific regulators are looking to facilitate industry growth and establish their credentials as crypto hubs in the region. Similar to their cynical counterparts, such an interpretation is also reductionist – the truth is much more nuanced. When asked about the various reports, all regulators in the three countries declined to confirm the stories.
APRA also pointed to an earlier statement that it was stepping up oversight of the banking industry and seeking to understand more about the potential consequences of US bank failures – a much more likely reason for these regulatory engagements given the moral hazard of encouraging banks to take on crypto clients.
Whatever the truth, the upside is that regulators are increasingly concerned about the risk of concentration among smaller banks that focus on niche corporate clients. Crypto companies in the US are also looking to diversify their risks and have found that larger banks – such as JPMorgan Chase and Citi – are more welcoming than they thought.
It is very possible that these recent events have turned the page in the relationship between banks, their regulators and crypto firms allowing for a closer dialogue and a better assessment of the risks related to cryptocurrencies. Such developments can only be positive for the crypto industry if it is to grow in the Asia-Pacific region, where many regulators remain open to the potential benefits blockchain can bring.
Contact us to learn more about how Elliptic can educate and train your bank’s officers to manage cryptocurrency-related risks and evolving regulatory expectations.
Financial Services Regulation APAC
