The Collapse of Silvergate, SVB Holds Some Lessons for the Indian Crypto Industry

It has been one grim wave after another that has rocked the boat in recent weeks – the back-to-back liquidation of two of the most crypto-friendly banks in the US, Silvergate and Silicon Valley Bank (SVB).

The collapse of these banks has caused widespread concern in financial markets, as industry experts are still assessing the impact on the crypto ecosystem. That said, banks have failed because of their risk hedging practices rather than their association with crypto. Support from the US Fed means markets expect them to pivot sooner (i.e. stop raising interest rates). Bitcoin (BTC) has bounced back nicely this week due to this expectation.

We believe that two important aspects should be considered in this context: the provision of good banking services to crypto entities and the importance of decentralized finance (DeFi).

Banking is a right for compliant platforms
SVB was a leading lender for unicorns, startups, and tech companies. Reliable reports suggest that he held $5 billion in assets from major crypto companies.

Crypto and tech companies had a convenience association with banks like SVB as they offered customized solutions and were more responsive. Major US banks were often skeptical of crypto businesses, and bank support remained minimal or hard to come by. This aspect should also make the Indian banking ecosystem think. The RBI, through a circular in 2018, had halted banking support for crypto businesses.

The rule was overturned by the Supreme Court in 2020, but bank support remained scarce. No big bank wanted to be associated with crypto. Even UPI based support is not possible for the industry. This is where the boldest small banks have helped the crypto ecosystem.

It is only now that the crypto industry is getting a legal mandate in India. From an unregulated space, crypto in India is becoming increasingly clear in areas ranging from taxation to advertising. The Center had recently introduced virtual digital assets (VDAs), more commonly crypto assets and NFTs; its business; guard; and related financial services under the Prevention of Money Laundering Act (PMLA). There is no longer any justification for leaving the crypto industry to the whims of the financial system. Exchanges and related platforms should have access to the best banking support if they are compliant and have effective risk management procedures.

It is unfair that the National Payments Corporation of India (NPCI) has restricted UPI access to crypto entities. Customers who would like to make UPI payments have instead started to use P2P in international exchanges, which is detrimental to the concept of regulation.

In this context, the retail CBDC pilot project by RBI is noteworthy. If expanded, this could become the default on-ramp for crypto and Web 3.0 transactions – i.e. investors can only transact with crypto and NFTs through the CBDC of retail. This can also be extended to sectors such as online games. Adoption and success of the retail CBDC depends on its use cases and the regulatory clarity that accompanies its use.

DeFi as an alternative
The collapse of Silvergate and SVB also highlights the fragility of centralized financial systems. With Indian banks better regulated and structurally sound, now is the time to take a cautious look at the capabilities of decentralized finance (DeFi).

DeFi uses smart contracts on a blockchain to execute financial transactions and bypasses middlemen. DeFi proved to be more nimble and survived despite market volatility, while centralized finance (CeFi), at least in the US, required bailouts.

DeFi systems are hugely dependent on technology and enable seamless and secure transactions that could revolutionize the banking and financial space if well adopted.
India has a large population of unbanked and underbanked individuals who could greatly benefit from DeFi. DeFi platforms could provide financial services to these people at a lower cost with more transparency and efficiency. Moreover, it could help reduce the risk of financial collapse, as the system does not depend on a few centralized entities.

Another important lesson to be learned from the recent bank collapse is the need for increased regulation and supervision. Although DeFi is a decentralized system, it still requires regulation to ensure its fair and transparent operation.

So, the need of the hour is for governments around the world to regulate this industry, create standards, and remove the barriers put in place to restrict innovation. Government should allow the move to a regulated environment firmly in its visibility and control. As this unfolds, the crypto industry will need to remain compliant and act responsibly to build trust with government and the public.

Vikram Subburaj, CEO, Giottos Crypto Platform

(Disclaimer: The recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)


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