When Main Street Banks Dabble in Crypto

more on that on a later episode this week. Like many crypto and crypto adjacent firms, traditional banks that diversified into the sector and the asset class have struggled during this crypto winter, and that's been true even before FTX declared bankruptcy in November two. We'll find out actually how many of these institutions are doing in the coming weeks, as they'll all start to report earnings, and we will

of course be reporting on them here at Bloomberg. But in the meantime, it's fair to say that a lot of the banks that got into crypto benefited when prices were rising and have struggled since last spring because the digital assets sector has just been on a downward trajectory. Here today, I'm delighted to be joined by my colleague Max Reyes, who is a Bloomberg report who covers, among other things, many of these crypto banks. We've seen stuff

in this genre before. I don't think we've seen this exact movie before, so it's hard to guess, and you know, I'm kind of remiss to throw a speculation out there, but I think the big thing we're gonna see more hardship, and the other question is our regulator is going to take more decisive action? Are going to see more regulatory action? Max? Welcome to the show. Thank you so much for having me. Glad to be here. What is it that you do

with Bloomberg? Exactly? I cover financial services, both banks, insurance, a little bit of everything, and like everyone else, I've been kind of press ganged into coverage of FTX and the fallout there, and it sort of ties to the traditional world of finance. Now, what exactly has been happening in the world of crypto and the world of traditional finance that you are in fact responsible for that has led to your bylines popping up on lots of stories

that have crypto in them. What's interesting about crypto is that even though nominally it's about moving away from centralization, moving away from fiat currency, to get into crypto and to bring retail customers into it, you need to have a place to put US dollars and you need to have a way to send US dollars to other people

in the space. And that's where traditional banks come in, and we're talking about primarily regional banks, smaller banks that decided they'd be willing to forge these business relationships with cryptocurrency companies. That's exchanges, that's miners in some cases, that sort of thing, and say, we have a platform, we

have a banking license or a charter. We can essentially be a depository, write a place for you to put your cash that you get from these operations, your U S dollars, your euros in some cases, and you can use our platform to send this fiat currency to other people. We're not going to touch your crypto unless you know,

cases of custody. But primarily what we're talking about as a sort of system that allowed this some folks called an on ramp or an off ramp for U S dollars in crypto to kind of go back and forth

between these two otherwise segmented, segregated financial systems. So it sounds like what you're saying is a lot of the banks that you cover their exposure to crypto came not through oh, we're buying a bunch of bitcoin, but we're going to have customers and clients who are themselves crypto companies or crypto exchanges or crypto lenders, and we will be their banking partner. Exactly. That's exactly the case. There were, however, and there are still a couple of institutions that do

have more direct exposure to crypto. How does that work in those cases? There there are a few examples. One thing that some folks do, primarily Silvergate, is they lend against bitcoin as collateral. They'll take your bitcoin, not literally take it, but they'll say, we'll give you a loan, it will be collateralized by this bitcoin that you're handing to us, and then if the bitcoin value dips between a certain level, you'll receive a margin call from us.

You know, we'll start to liquidate your position. That's that's one thing we've seen. The other hand. And this is some of the more traditional players have gotten into this or want to get into this. We're talking B and Y melon U S. Bank is custody and that means they're literally just saying you hand us, not the literal keys. There are literal keys involved, but the metaphorical keys to your cryptocurrency. Will hold on to that for you, will keep it safe for a bank. That's what banks do.

People have been handing us valuable stuff forever, and now we're just gonna do that with these virtual tokens. As you put it, like very very traditional banking type responsibilities. Why did it all go wrong? That's I think the the answer has three letters and it's f t X right. But uh, to be more specific, the the issue here for for these banks, and specifically the ones that are dealing with i'd say turmoil trouble are the folks who

really double down on crypto. We're talking Provident Bank, We're talking most specifically silver Gate, Um other folks who have seen shares definitely weaker, not to the same degree, but definitely weakness. They're like Signature Bank. The issue is that there's been panic in the crypto markets because FTX revealed that someone who are an organization that was thought to be one of the most stable players in the space wasn't right. You know this this the foundations were not there,

and so you had a panic. You had, in silver Gates case, a bank run which people were pulling deposits out of the bank because they were worried. And there's also just less um, you know, treading, less activity in the world of crypto because folks are losing money. Right, So that combined together means that if you are anyone who has doubled down on crypto as your your bread and butter, the main thing you're doing, you're gonna be

in find, you know, a tough spot. In January, silver Gate announced reorganization and and keep in mind as well, that not the only ones talking about layoffs and having to cut spending. We're seeing this across various folks that operate in the crypto space. It's just that specific to

these banks, they're offering traditional financial services. They have a bank charter, they have f d I C, insurance, UH and other sort of access to funds that a traditional crypto player that doesn't have a bank charter would would not be able to to touch those banks because of their charters. Because they have these you know, they have access to federal pools of money that other crypto donative

organizations don't have access to. They're essentially able to like bail themselves out using government or federal funds, and that that's happening, even though those bailouts came because they were speculating on an asset class that not every regulator is super happy for them to be involved with in the first place. What what's happening there? What is the sentiment from regulators around this right now? Yeah, that's definitely one major criticism, one that's definitely been voiced by a lot

of folks, especially short sellers, looking at these stocks. The the answer on what regulators are saying is kind of disappointing, but it's it's sort of not much. Essentially. The the word from the SEC, the FED, and the fd I C which put out a joint letter in January, is be very cautious. You know, they're they're really worried about the potential systemic risks presented by these digital tokens if the contagion from crypto were to spread into the traditional

banking system. Folks would rather see this happen at these smaller regional players that are not you know, important to the kind of fabric of the financial system, the global financial system. But that's kind of cold comfort to folks who are worried about taxpayer dollars going to cover what is a very risky and untested space. Up next, you'll hear more from x Rays on what we can expect in three as it relates to these crypto exposed banks.

This is a fact that I didn't know, but Provident Bank one of the ones that you mentioned, it's first chairman fourth under George Washington in the Revolutionary War. This is like, this is a bank that has had generations of relationships and they've kind of crushed on their crypto exposure. So it's not that these banks are new. They have had successful businesses in some cases for you know, hundreds of years. Why did they get into crypto in the

first place, Like what was the attraction to them? The big thing that you have to keep in mind when it comes to regional banks, and that's you know, these banks that are smaller that are focused on specific states or specific chunks of the country, is that they've had a lot of competition for a long time until recently, especially during the pandemic, they were dealing with this very

low rate environment. They were dealing with this inability to keep up with spending on technology and resources, encroachment by the largest US banks. So they had to specialize. And that's something a lot of analysts have talked about, something that regulators are aware of. And sometimes that specialization comes in the form of focusing on real estate. In a case of Silicon Valley Bank, you know, they really doubled down on their interests in funding and working with startups

and venture capital funds and that sort of thing. And in the case of these banks were talking about right now, they kind of hitch their wagon to cryptocurrency because it was an area that other folks, other banks were not dealing with. It was an area where they thought if they took the right risk attitude, the right stance, they could do it in a way that would be profitable

without introducing too much risk. But what we've seen in several cases, right is that I guess you could say the foundations of the industry were not there to support this sort of let's call it an eggs in one basket strategy. It has not been as sustainable or sustainable to the extent that would want the business model of

a financial institution to be. For some of these organizations when they and I'll use silver Gates as an example, came out and said, Hey, we're going to issue our own stable coin, or we're going to become, you know, the leading experts on how you custody crypto assets for customers, which was kind of one of the press releases put out by US Bank, which is one of the largest regional banks in the in the United States. What does three hold for the prospects of these kinds of banks,

especially as it relates to crypto. Yeah, if I if I knew, I don't think i'd be in the certain necessarily. I think we're going to see a lot more just of this pain, this blood letting. I'm not going to kind of I don't have a crystal ball to look into, and I don't think I'm allowed to make any outsized projections as a reporter here at Bloomberg. But fundamentally, what people are going to be looking for is whether or not these banks can I guess whether the storm let's

call it. If you look at silver Gate, it's track record, this isn't the first Crypto Winter it's gone through. But you know, when the last time this came around, to my knowledge, they weren't yet public, right, So it's the kind of thing where not only is the bank larger in scale and kind of prominence, but also there are

just more eyes on it. In the last Crypto Winter also did not feature the collapse of this player seen as the adult in the room right in the in the form of fd X. So I think it's hard to draw comparisons or through lines. Uh. You know, I hate using the word I'm precedented, and I'm pretty sure if I use it again and a sentence, I get like a golden watch or a free McDonald sand which.

But we've seen stuff in this genre before. I don't think we've seen this exact movie before, So it's hard to guess, And you know, I'm kind of remiss to throw a speculation out there. But I think the big thing we're gonna see more hardship, And the other question is our regulators is going to take more decisive action.

Are going to see more regulatory action. We've obviously already seen regulators looking to f t X, We've yet to see specific investigations of these financial institutions when it comes to their dealings with crypto. But there are questions about it. Lawmakers have raised questions and letters. Senator Warren among others,

have issued letters asking questions. Yeah. But and and that's the thing is that for the most part, what we're talking about amounts to two questions raised by folks kind of outside the rooms, but not necessarily the regulators the banks themselves. And I think that's what we're all waiting on, you know, is whether or not another shoe is going to drop in that on top of these kind of really difficult market and fundamental challenges, whether or not regulators

will step up and say something. And I think that's one of the big questions that I'm going to be you know, pondering and hopefully writing stories about. Yes, yes, yes, I don't just stand in a room and think I've been telding thoughts but not file any stories. Yeah. I wish, I wish our jobs would be so much easier if we only have to think and not then write things down. Um, Max, thank you so much for being on the show. Yeah, thank you for having me. That was Bloomberg Reports to

the Max. Rez You can find more of his reporting in the Bloomberg Terminal and on Bloomberg dot com, and be sure to check out art twice weekly Newslesso, which is also called Bloomberg Crypto. This is Bloomberg Crypto, a daily podcast from Bloomberg and I Heart Radio. For more shows from I Heart Radio, visit the I Heart Radio app, Apple Podcasts, or wherever you get your podcasts. Send us your comments, questions, or suggestions for the show to Crypto

at Bloomberg dot net. The supervising producer of Bloomberg Crypto is Vicky Vergelina. Our senior producer is Janet Babin. Our producers are Mohammed Faruk and Sharon Barriro. Our associate producers are Ty Butler and Moses on Them. Desta wonder At is our engineer. Original music by Leo Sidrn. I'm Stacy Marie Shmal. We'll be back tomorrow