Good morning. Here’s what’s happening:
Prices: Bitcoin, ether and other major cryptos spent another day in the green after an encouraging inflation report and continued hopefulness for a less hawkish Fed.
Insights: The crypto industry must mature to develop productive relationships with banks.
Inflation dipped encouragingly. Investor hopes for a less-draconian U.S. central bank continued.
Bitcoin embraced the more upbeat vibe and continued its romp upward for much of Tuesday, rising above $26,000 at one point for the first time since last summer before retreating more than a $1,000.
The largest cryptocurrency by market capitalization was recently trading at $24,936, up about 2% over the past 24 hours. BTC's stall followed two consecutive days of double-digit gains tied to Binance stablecoin conversions, investors' relief that the banking sector would not collapse, and that the Federal Reserve would reverse its steady diet of hawkish interest rate hikes.
On Tuesday, a small decline in the consumer price index (CPI) from 6.4% in January to 6% last month seemed to offer the Fed fresh grounds for monetary dovishness. Even a month-over-month increase in the the core inflation rate, which removes volatile food and energy costs, included a counterweight – a slight annual decline.
“Bitcoin is surging because the liquidity situation appears to be shifting rapidly," Joe Ziolkowski, the CEO and co-founder of digital asset insurer Relm Insurance, wrote in an email to CoinDesk. "Today’s CPI data shows that inflation is slowing.
Ziolkowski noted that the latest banking crisis involving the collapse of Signature, Silvergate and Silicon Valley banks had "triggered a federal response, injecting a lot of money in the economy, and strengthened Bitcoin's use case as a decentralized alternative to our existing banking system."
"Investors are clearly showing confidence in this," he wrote.
Ether was changing hands just above $1,700, about where it stood on Monday, same time. The second-largest cryptocurrency has roughly matched BTC's upswing this week. Other major cryptos spent most of Tuesday healthfully in the green before flattening. APT, the token of layer 1 blockchain Aptos was recently up more than 14%. CRO, the native crypto of crypto exchange Crypto.com, rose about 6%. The CoinDesk Market Index, a measure of the crypto market's overall performance, climbed 2.4%.
U.S. equity markets also took heart from the CPI report with the tech-focused Nasdaq and S&P 500 jumping 2.1% and 1.6%, respectively. But as CoinDesk analyst Glenn Williams wrote in his Tuesday column, the Fed's path forward at its March 22 meeting remains uncertain.
Reim's Ziolkowski noted optimistically that "pressure is now mounting on the Federal Reserve to slow the pace of rate hikes, and perhaps even stop hiking altogether, given that the rapid rate increases over the last year have clearly placed significant stress on the system."
He added: "The setup for a durable rally for bitcoin and other digital assets appears to be in play.”
Crypto Industry's Banking Learning Curve
The voluntary liquidation of Silvergate, crypto’s go-to bank, and subsequent regulator action to seize Silicon Valley Bank sent shockwaves through the industry.
While depositors will be made whole, the shockwaves the industry is feeling are no longer from the concept of funds lost, but rather the loss of industry-friendly banks that were pillars of the sector.
As CoinDesk recently reported, Crypto companies being orphaned by the downfall of Silvergate and Signature as well as the incompetence of Silicon Valley Bank, hurt the industry.
William Quigley, a co-founder of Tether, who now runs the non-fungible token (NFT) exchange WAX, highlighted to CoinDesk in an interview that Silicon Valley Bank’s demise was one based on managerial incompetence.
Holding long-dated, government-issued debt, purchased at a time when interest rates were low, then having to jettison it at fire-sale prices to shore up liquidity when its startup clients stopped raising money and started just spending, was not a great move but should have only been a challenge and not a fatality for banks, he says.
Quigley says that around June 2022 management should have noticed the impairment of its bonds and government securities and moved to sell off the portfolio and take the losses, or bring in more deposits.
“I've been an audit committee chairman and a bank auditor. I know the conversation that happens when deposits are going down at an accelerated rate and our investment portfolio is being impaired to the point where we don’t have enough money to pay off depositors,” he said.
A lack of communication
Management should have been in touch with the Fed in January, and the Fed should have put the bank in some sort of supervisory wind-down then.
The problem that’s going to emerge from this, he says, is a lack of trust. SVB was regulated by multiple federal and state agencies, had a clean audit opinion, and was rated as investment grade by a federally licensed rating agency, making it seem like a good bank.
SVB existed because large banks would typically not give tech startups and crypto companies the time of day.
But that doesn’t mean it's impossible.
As CoinDesk recently reported, crypto conglomerate Digital Currency Group (DCG) has been having productive conversations with the likes of Santander (SAN), HSBC (HSBA), Deutsche Bank, and United Overseas Bank (UOB) in Singapore, as well as fintechs such as Revolout about onboarding its portfolio companies.
DCG is reportedly having conversations with big banks, but there’s no guarantee that they will come to fruition. These banks might end up spooked by something, and decline to onboard companies orphaned by Silvergate-SVB-Signature. DCG is the parent company of CoinDesk.
For roughly the last decade, Taiwanese crypto exchange Maicoin has had fiat on- and off-ramps with Far Eastern International Bank, which would be categorized as a big bank by the Fed.
Alex Liu, the CEO of Maicoin, told CoinDesk there wasn’t really any magic to convincing banks to give his exchange fiat pipelines. He’s also quick to point out that the root cause of these three banks' demise in the U.S. is not crypto itself.
“It involves being able to come across not as a bomb-throwing radical. It helps if you can put on a suit, and talk about things like investor protection, [know your customer/anti-money laundering] and so forth,” he said.
It also helps to have a physical address for your headquarters, he continued. Maicoin’s headquarters are in an office tower in downtown Taipei.
“How many crypto companies refuse to do that one thing?” he asks.
Crypto banking issues in Asia?
As all of this occurs, many jurisdictions in Asia, from Hong Kong to Taiwan, are working on building a crypto licensing regime for retail traders.
Certainly they will be looking to the U.S. to see what’s going on especially given the last six months which involved the collapse of FTX and now three banks.
No regulator or lawmaker in the U.S. has come out and said directly: "Hey, let’s just ban this thing," Liu points out.
Regulators in Asia are going to take that as a clue.