Crunch time for crypto as investors assess SVB damage | alternatives

As banks, which have been a major source of funding for the cryptocurrency industry, go out of business, questions are being asked about how crypto goes from here. Family investors interviewed by Asian investor feel the industry is at a crossroads.

Crypto exchanges and their customers formed a significant part of Silicon Valley Bank’s (SVB) and Signature Bank’s deposit bases, but any sense of camaraderie evaporated as their weaknesses became apparent.

It’s the opposite of the so-called prisoner’s dilemma in game theory, said Singapore-based family office investor Edward Foo.

“The optimal result inherent in this state is ‘the self’: being ahead of others and to the detriment of others. It’s not based on an optimal outcome for everyone involved,” Foo said Asian investor.

“We’re in the age of instant messaging now, and a bank run isn’t what it was when people were queuing to get into the bank,” said Hong Kong entrepreneur Timothy Tsui.

“The craziest thing is the speed of what just happened. As soon as people receive a group message stating that this bank may go bankrupt, the first thing they do is log into their online bank and start transferring funds immediately. That has never happened before.”

Influential industry players in conversation with Asian investor revealed they had received messages from friends who worked at SVB saying: “Please tell your friends to bank with us, we are the best place to put your money now.” In theory, they have Right, because the government has stepped in to guarantee depositors, but it remains to be seen if that money will come back.

Last year’s “crypto winter” marked by the collapse of FTX was a sign that the knives were on crypto. This recent crisis has only strengthened the stack.

Horace Ma, director of Hong Kong family office Mardell Investments, has not been significantly affected by the recent bank failures but remains skeptical about the future of crypto as it stands.

“These crypto freaks always want a DeFi environment. But it’s unrealistic when all the governments of the world want you to be held accountable to tax you for every dollar you earn and own. You could not detach yourself from the fiat currency system as long as you have a physical presence in this world. Therefore, all crypto funds are fiat related and ultimately everything in the crypto world needs to be taken care of even in the fiat world.

Henry Chong, Fusang

Henry Chong, chief executive of digital exchange Fusang, said Asian Investor, “It has always been a question of how crypto connects to the real world.”

“It has always worked in a slightly parallel system. This recent crisis will bring this even more into focus. If crypto technology is to be interesting, it needs to fully interact with our everyday lives. If it is a payment system, can I use it for payments? If I can’t do that and in reality always have to remit in, say, US dollars and local currencies to make payments, it doesn’t really do the job.”

IMPACT ON INVESTORS

Foo believes that while only a handful of people probably really know what happened at SVB and Signature, events like this don’t just “happen”.

“This type of behavior is not isolated at all. Has anything really changed since 2008/2009? Similarities can be observed with the various scandals that have happened in the crypto world just in the last 9 months.

“Critically, what does this mean for the private equity and venture capital world, particularly for investors with a heavy focus on technology?” He expressed concern about the impact on pension funds if the contagion leads to significant price discounts.

“Markets and economies are more interconnected than we care to admit.”

As BlackRock CEO Larry Fink noted in his annual report Shareholder letter issued this week: “Markets remain tense. Will asset-liability mismatches be the second domino to fall?”

And possibly a third: “In addition to duration mismatches, we can now also see liquidity mismatches. Years of lower interest rates caused some asset owners to increase their commitments in illiquid assets, trading lower liquidity for higher yields. These asset owners are now at risk of a liquidity mismatch, particularly those with leveraged portfolios.”

FUTURE OF CRYPTO

If the future isn’t exactly bright for crypto, there’s still room for the industry to move toward more meaningful integration, Chong said.

“For the past year, crypto has faced crisis after crisis – two rounds of crypto winters, many institutions blown up, and now this entire banking situation that has been… difficult for the B-to-C crypto industry. The point now is to say how we can make it more efficient for the benefit of the financial industry.”

Fink believes that the operational potential of some of the underlying technologies in the digital asset space could have exciting applications.

“Asset class tokenization in particular offers the prospect of increasing efficiency in capital markets, shortening value chains and improving costs and access for investors. We continue to explore the digital asset ecosystem, particularly areas that are most relevant to our clients, such as permissioned blockchains and tokenization of stocks and bonds.”