Editorial: Crypto players face regulatory headaches after failed Signature, SVB, and Silvergate but growth will persist
The failures at Signature, Silicon Valley Bank (SVB), and Silvergate will chill the expansion of crypto-related businesses in the EU, especially as new rules for distributed ledger technology (DLT) and virtual assets are slated for parliamentary approval next month.
Having held $209 billion in assets at its collapse, SVB’s closure last week became the second-largest US bank failure in history behind Washington Mutual, which held $434 billion in assets when it failed in 2008. SVB collapsed after depositors withdrew more than $42 billion after saying that it needed to raise $2.25 billion to shore up its balance sheet. Days prior to the run at SVB, which has a large number of crypto startups as customers, Silvergate, a crypto-friendly bank, announced its voluntary liquidation. In the same week, Signature Bank — the next biggest crypto-friendly bank to Silvergate — was closed abruptly by the regulators.
Because of the scale of these bank runs, crypto-related businesses in 27 member states would struggle to follow the proposed Markets in Crypto-Assets (MiCA), specifically with its requirement to take “an insurance policy covering the territories of the Union where crypto-asset services are actively provided or a comparable guarantee” or own funds consisting of Common Equity Tier 1.
Put simply, crypto companies would struggle to beef up their assets or get insured in accordance with the proposed MiCA’s Article 60 on prudential requirements. Following the bank runs in the US and how regulators handled the situation, banks and insurers in the EU would be even more adamant about dealing with crypto-related business.
The proposed MiCA’s required insurance policy shall have an initial term of no less than one year. It shall cover against the risk of loss of documents; misrepresentations or misleading statements made; acts, errors, or omissions resulting in a breach of legal and regulatory obligations; the duty to act honestly, fairly, and professionally towards clients; obligations of confidentiality; failure to establish, implement and maintain appropriate procedures to prevent conflicts of interest; losses arising from business disruption or system failures; and where applicable to the business model, gross negligence in the safeguarding of clients’ crypto-assets and funds.
Innovators will shy away from the US as other countries open their doors
By abruptly placing Signature Bank into receivership, the US regulators once again sent a strong message that players in traditional finance [TradFi] should stay far away from crypto. More importantly, however, the event underscores the vulnerabilities of the traditional financial system, as regulators once more stepped in and bail out banks.
BTC prices stayed within the USD 20,000 level amid the back-to-back shocks, demonstrating the resilience of the crypto ecosystem. Even with the lack of support from US regulators, the confidence of investors (evident in BTC price) will encourage innovators to move away from the US and find a new home elsewhere. This will open up the opportunity for other jurisdictions to step in, like Hong Kong and the UK, which are opening their doors to crypto development.
Meanwhile, despite the US’ best efforts to squash crypto, some TradFi firms are still showing their support for the crypto industry. For example, weeks before the SVB bank collapse, Fidelity, which has 37.1 million total retail accounts, quietly launched Fidelity Crypto, giving millions of retail customers access to BTC and Ether.
Update: BTC touches USD26,000 as if crypto-friendly banks hadn't been hit
BTC prices rose above the USD26,000 mark, for the first time since June 2022, as investors react to the inflation data released by the US government. In line with market expectations, the headline consumer price index rose 6% from last year and core inflation rose 5.5%. Markets are now predicting the Fed will be less aggressive with interest rate hikes given the inflation report from the US Labor Department and the collapse of the SVB. This means better risk sentiment for the crypto market.
Update: BTC broke the US27,000 on Friday, March 17
Related story - The curious case of Kraken: Innovators will always find a way
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