The banking sector is in a tailspin. Last month, Silvergate Bank, Signature Bank and Silicon Valley Bank all shuttered. On March 26, First Citizens Bank acquired Silicon Valley Bank. Their stance on cryptocurrency is, as yet, unknown - as is the status of the crypto companies once supported by Silicon Valley Bank. 

While trust in banks is tanking, will crypto – and its decentralization dreams – emerge unscathed? 

“In the short-term, I believe banks are going to be skittish to start servicing crypto companies,” said Vineeth Bhuvanagiri, managing director of EMURGO – a firm that’s helping bring legacy financial institutions into the crypto ecosystem. Before EMURGO, Bhuvanagiri was the blockchain solutions provider at Paxos. 

“Banks are fearful that they’ll become targets of regulators if they start servicing more crypto companies. Therefore, it’ll likely be more difficult for fintech companies to continue forging ahead building relationships with banks as regulators become more stringent,” he said. 

“Perhaps it’s been said but not enough: These banking failures had nothing to do with crypto.”

— Vineeth Bhuvanagiri

Bhuvanagiri calls 2023 “a wait and see year.” Even if banks have the desire to explore crypto, many will wait until the dust settles and this is out of the headlines, he said. 

“If the regulatory response to the banking crisis leads to falling interest rates and rising liquidity, that could be bullish for crypto. Low interest rates are good for crypto and help long-duration assets perform,” said Bruce Liu, portfolio manager and chief executive officer of Esoterica Capital in New York City. 

“On the other hand, when the growth is slowing down and we’re going into a recession, that hurts earnings. It’s a trade-off. If we move into that scenario, valuations get support, but earnings get more pressure. Crypto doesn’t have earnings, so it’s a liquidity game,” he said. Liu said crypto will have price actions similar to the NASDAQ 100. 

Will we see a crisis akin to 2008 again? 

“Banking is no longer what it was, pre-2008. Banks are becoming like a pipeline for credit creation. They do less and less. When banks have problems and they’re insolvent, the country comes to the rescue. I can see our monetary policy moving towards a central bank digital currency (CBDC),” Liu added. 

“Now that the banks can’t be trusted, we have to trust the sovereignty of the United States. When we can’t put our faith in our country, we have to trust the algorithm. There’s total transparency there,” he said. 

While Liu believes a CBDC is inevitable he doesn’t think the traditional monetary policy regime will disappear. 

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Bhuvanagiri, on the other hand, worries the U.S. will lose its innovative edge, with the potential outflow of crypto businesses and talent shifting overseas to competing markets. 

“We’re seeing a lot of activity as it relates to people moving offshore for their banking needs – in places like Dubai where regulators are more amenable to crypto businesses,” he said. 

“There are real fears that the U.S. dollar will lose its hegemony as the [global] reverse currency. Losing trust and reliability of USD means that many will, if they haven’t already, move to the Yuan. We can already see Brazil moving this direction,” Bhuvanagiri added. 

“Perhaps it’s been said but not enough: These banking failures had nothing to do with crypto. The real reason behind the recent collapses was a mixture of investment risk mismanagement and lack of regulatory oversight. But they will have an outsized impact on crypto and other fintech companies,” Bhuvanagiri said. 

“Our ability to properly stress test banks could certainly be to blame,” he said. “We need changes to how banks are regulated or overseen as it relates to liquid assets – to protect depositors from these types of poor investment schemes that sow fear and doubt.”