The Concentration of Crypto Assets in Banks Contributed to the 2023 Banking Crisis
The Bank for International Settlements (BIS) has identified the concentration of crypto assets in banks as one of the factors behind the banking crisis that occurred in 2023. By the end of June 2022, banks had $4.2 billion directly exposed to crypto assets. Signature Bank, in particular, failed to recognize the risks associated with relying on deposits from the crypto industry, which left it vulnerable during the crypto collapses of 2022. Additionally, the bank did not have enough liquidity to handle withdrawals from non-crypto depositors who were concerned about the liquidation of Silvergate.
BIS Calls for Proactive Intervention, but Faces Legal Risks
The BIS suggests that regulators adopt a holistic approach that combines rules with proactive intervention when necessary. However, this approach carries legal risks as banks may resist interventions without a solid legal basis. The Federal Deposit Insurance Corporation’s request for Signature Bank’s acquirers to divest its crypto customers and assets worth $4 billion demonstrated the potential for legally questionable interventions. Similar efforts in the past were criticized as an abuse of power by the House Financial Services Committee during the Obama administration.
Money Laundering Concerns Remain Prominent
The collapse of banks had a significant impact on Circle, whose stablecoin lost $10 billion in market capitalization following Silicon Valley Bank’s failure. As regulators are pushed towards clearer crypto regulations, some countries like Hong Kong, Japan, South Korea, and certain European nations have implemented licensing regimes for crypto firms. However, registered firms must secure local banking partners, which can be challenging due to concerns over poor Know-Your-Customer processes and money laundering risks associated with exchanges.
Banks in Progressive Regions Take Proactive Measures
Despite the challenges, banks in progressive regions are becoming more proactive. For example, HSBC Hong Kong now allows its customers to invest in Bitcoin and Ethereum exchange-traded funds after confirming their understanding of educational material on virtual asset investments. ZA Bank in Hong Kong has also established a sandbox that involves 100 firms, connecting its systems to the city’s company register and implementing anti-money laundering procedures. In South Korea, Shinhan, the oldest bank, is testing remittances in a closed sandbox and exploring the use of stablecoins, which offer protection against currency fluctuations within existing AML frameworks.
Hot Take: The BIS Report and the Collapse of Crypto Banks
The collapse of crypto banks highlighted the risks associated with the concentration of crypto assets in traditional financial institutions. It also emphasized the need for regulators to strike a balance between implementing rules and intervening proactively when necessary. While some may view interventions as overreach or potentially abusive, addressing money laundering concerns and establishing clearer regulations can help build trust and stability in the crypto industry. As banks in progressive regions take steps to accommodate crypto businesses, it is essential to ensure robust compliance measures to mitigate risks and protect both customers and financial institutions.
By
By
By
By
By
By