Crypto Banking In Chaos: Exchanges Collapse And Regulatory Pressures
The collapse of the FTX exchange caused a damaging run on two US-regulated banks, leading to one of them, Silvergate Capital Corp., selling assets at a loss to repay depositors and lenders.
The event has now prompted Silvergate to warn that it may not be able to continue as a “going concern.” Furthermore, the US Federal Reserve rejected a membership application from Custodia Bank, a full-reserve bank providing payment and custody services to crypto businesses, in a decision that sent shockwaves across the crypto world.
Regulators in the US are now pressuring banks to withdraw banking services for crypto platforms and exchanges. However, crypto exchanges, lenders and stablecoin issuers still require access to banks, as all dollar-denominated transactions, except those made in physical notes and coins, go through the US banking system and are ultimately settled across the books of the New York Federal Reserve.
The business model of a traditional bank is to borrow at a low-interest rate, lend at a higher interest rate, and pocket the difference. Thus, traditional banks are important liquidity creators and distributors in financial markets and the wider economy. However, crypto companies want a type of bank that the US does not currently have: a “full-reserve” bank.
A “full-reserve” bank is not allowed to lend, but can receive deposits and provide asset management, custody, and related services, and must maintain unencumbered liquid assets of at least 100% of its total deposits.
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