What Big Banks Wanting To Get Into Crypto Can Learn From Small Bank Crypto Veterans

The news: Smaller banks that saw an opportunity in crypto are now feeling the pinch, by the Wall Street Journal. There are lessons to be learned from the big banks advocating for a bigger role in the asset class.

The role of small banks: With the advent of crypto and digital assets, smaller banks saw a way to break into the industry and provide a service that most big banks avoided.

Banks love Silvergate Capital, Signature Bankand Bancorp Customers has taken billions of dollars in deposits from crypto exchanges, investment firms, and stablecoin issuances. But 2022 was a year like no other.

• Silvergate Capital saw its deposits fluctuate by $5 billion in the second quarter. But in the end, deposits held steady at $13.5 billion.
• Signature Bank reported a drop in deposits in the second quarter, only the second time it had happened in the past 10 years. The bank faced difficulties when one of its main customers, Celsius Network, filed for bankruptcy.

Driving deposits: Smaller banks often struggle to maintain a healthy level of deposits, as customers are attracted by the larger banks’ better rates and other incentives. The crypto market offers small banks an alternative to increase their deposits.

• Banks do not hold crypto or digital assets. Instead, they provide corporate accounts to crypto businesses, which makes it easier for crypto businesses to provide liquidity to customers or quickly purchase digital assets.
• Big banks tend to avoid holding deposits for crypto businesses – they prefer to hold stable, low-cost deposits that will help them offer longer-term loans.
• Banks with deposits for crypto businesses usually aren’t able to grow their loan books as quickly because they need a larger cash cushion for potentially wild fluctuation in deposits.

This year provides an excellent example of rapidly changing deposit levels. When crypto market volatility increased, banks saw an increase in deposits, trading declined, and investors waited to see how things unfolded. But when investors learned that their assets were uninsured, they flocked to divest from the asset class and withdraw their deposits.

The bigger picture: While smaller banks have been the major players in crypto exchanges and issuers, the big banks are asking for a position in the field. Earlier this month, banks pleaded with the Biden administration to have a bigger role in developing digital asset regulation and for permission to engage in other crypto activities.

• Banks say their heavily regulated industry makes it the ideal space for innovation.
• But reviews fear that if big banks get carried away with crypto, the volatility of the asset class could spill over into traditional markets.