Defaults, debankings and more: Unlocking USD for crypto platforms
Introduction:
In our last Crypto Legends podcast of the season, Defaults, Debankings & More: Unlocking USD for Crypto Platforms, industry experts Mirnas Brescic, VP of Revenue and Treasury at Rain, and Daniel Gouldman, the ex-CEO of Unbanked, joined host Adam Bialy to delve into the intricate world of cryptocurrency, focusing on the pivotal role of the US dollar in the ecosystem.
The fallout of Silvergate and Signature: A turning point
As discussed in our previous blog post, Becoming Crypto Winter Proof , the fallout of crypto-friendly banks Silvergate and Signature dramatically impacted the market. Most importantly, they were the key providers for 24/7 USD settlement, resulting in short-term shocks. However, a knock-on effect of the collapse was a need for more trust and clarity about who was exposed to the two banks. This led, Mirnas noted, to the medium-term absence of any new player trusted to fill the role. The current situation, he added, involves “much higher working capital requirements than before because we cannot settle instantly. That also means a lower return on capital. And we see many players trying to get into this space from the banking side, but also from the custody side, I would say. But it’s still developing.”
US Banks: A Tough nut to crack
Unfortunately, until regulation in the United States is much more straightforward, banking in the US as a crypto platform will prove difficult. From Daniel’s six years of experience speaking with banks on this matter, he shares that they had one of two approaches. Firstly, many banks are under strict directives to avoid crypto transactions entirely. Daniel shared that many banks have a complete prohibition from higher authorities, leading to a hardline approach against any crypto involvement.
The second approach, while not outright banning crypto, involves heavy discouragement. Banks adopting this method subject crypto transactions to intense scrutiny. As Daniel paraphrased, “If you do [crypto], we’re going to audit you with 60 different questions on this audit, only on crypto, which is very paperwork intensive.” This tactic, characterized by exhaustive audits, aims to make dealing with cryptocurrency exceedingly demanding for both the bank and its clients.
Highlighting specific instances, Daniel noted that some banks, like Metropolitan Commercial in New York and Evolve Bank in Tennessee, have opted out of the crypto market entirely. Conversely, a few banks like Pathward Banks and MVB are engaging with major crypto players like Coinbase and Kraken, respectively, albeit in a limited manner. Daniel pointed out that while some banks might involve themselves in crypto-related activities, it is only likely to become a core part of their services once regulatory uncertainties are resolved.
Global trends and the future of crypto banking
Because of the barrier to entering the US, Daniel and Mirnas discussed the possibility of banking USD outside of the US. Daniel pointed out, “I think you’ll probably see a lot more banking in dollars outside of the United States because the U.S. government has made it really, really difficult to operate right now.” Mirnas shared that he was already seeing such efforts to enter the space by players & banks in both Dubai and the United Arab Emirates as a whole.
Additionally, Brescic was confident that Tier-One banks would enter crypto, albeit cautiously. The banks would likely approach entering “from a custody angle [at first]. So I think the next natural step might be that some of the existing custodians or banks that will enter the custody space will introduce fiat to fiat or fiat to crypto settlement.”
Paypal and Digital Payments: A case study for crypto today
On the subject of filling the USD gap, Daniel drew attention to the early days of PayPal’s emergence. “The only reason that PayPal is PayPal is that at the advent of the … adoption of the internet, when banks and Visa MasterCard stepped away from their traditional role as payments facilitators because they were scared of the risks associated with the internet, PayPal, somebody filled the void.”
This observation underlines how PayPal capitalized on the gap left by traditional financial institutions during the internet’s nascent stage, leading to its eventual dominance in the online payments space. He likens this to the current situation in the crypto industry, where platforms like Tether and Circle have stepped in to fill a similar void. Daniel further predicts the future trajectory of these crypto platforms in the context of traditional banking’s evolving stance towards digital currencies. “It’s a matter of time. The big banks are going to fill their … natural role; they’re going to step in…eventually.” Despite this anticipated shift, he believes platforms such as Tether and Circle will retain a significant legacy and financial strength, having capitalized on the opportunity created by the banks’ initial hesitation. Daniel concludes, “You’re still going to have the aftermath of Circle and … Tether… who [will] have billions and billions and billions and billions of dollars. And they’re going to have benefited from the fact that all these big banks basically abdicated their responsibilities over the past eight plus years.”
A sector poised for growth and innovation
Defaults, Debankings & More: Unlocking USD for Crypto Platforms offers a comprehensive view of USD’s current state and future potential within the crypto industry. The insights from Mirnas Brescic and Daniel Gouldman, guided by Adam Bialy, reveal a sector in flux, grappling with regulatory challenges yet poised for significant evolution and growth.
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