Crypto companies are looking for banking partners after the collapse of three crypto-friendly lenders in the US last month, raising the risk the business will become concentrated in smaller financial institutions.
The scenario concerns US regulators, who have expressed doubt about the safety and soundness of bank business models that are highly focused on crypto clients after Silvergate Capital, Signature Bank and Silicon Valley Bank imploded.
Regulators have told banks to be alert for liquidity risks coming from crypto-related deposits, which could be subject to rapid outflows if customers try to redeem their crypto assets for real money.
Mainstream banks have become increasingly wary of crypto clients following a series of high-profile collapses, including the bankruptcy of major exchange FTX in November last year, and a lack of regulations.
“Crypto and Web3 start-ups are telling us they simply cannot get a business bank account,” said Marcus Foster, head of crypto policy at Coadec, which represents UK start-ups.
He said the issue had become “significantly worse” recently.
This has left digital asset companies with little option but to seek out smaller financial institutions, some in more remote corners of global finance.
A representative for FV Bank, a US-licensed FinTech-focused bank in Puerto Rico, reported an increase in inquiries from potential customers in recent weeks, even though it was not insured by the Federal Deposit Insurance.
The bank does not lend and is therefore not subject to the same type of risks as traditional banks that operate on a fractional reserve system, a representative said.
In Liechtenstein, a representative of Bank Frick said it also experienced a “significant increase in account opening requests”, with the largest portion of inquiries coming from companies in Europe, Singapore and Australia.
However, the bank is not focused purely on crypto and has a broadly diversified business model, the representative said.
Switzerland-based Arab Bank said in March that it had seen an increase in US companies, mostly crypto funds or those involved in crypto venture capital, seeking to open accounts, but that the bank was unlikely to accommodate all of them.
ZA Bank in Hong Kong, a digital bank, reported about four times more enquiries from crypto companies seeking accounts after Silicon Valley Bank’s collapse, although it said it would only accept firms licensed to trade virtual assets.
Nikki Johnstone, a partner at the Allen and Overy law firm in London, said the “concentration risk” that came from a growing number of clients seeking business from the smaller companies was the “biggest challenge” of having reduced crypto banking options.
“That places a greater degree of expectation on that firm to apply the right level of risk management and monitoring,” she said. In the current inflationary environment, where the value of major global currencies is being eroded at an accelerated rate, flatcoins could hold the answer to the challenge of wealth preservation.
In fact, such an inflation-pegged asset already exists — the Nuon flatcoin. Nuon is soft-pegged to the current value of a basket of goods via a dynamically adjusting algorithm.
The flatcoin’s value in US dollar terms changes based on Truflation, an independent inflation index that estimates the real percentage rise in prices in the US on a daily basis.
This ensures the purchasing power of one Nuon flatcoin remains constant, whatever the real rate of US inflation may be.
Long-term devaluation
While the recent economic backdrop has accelerated the need for a US dollar alternative, the writing has been on the wall for a long time.
Since the 1970s, the greenback has lost a staggering 95 per cent of its purchasing power due to inflation.
In the past two years, the economic fallout from the Covid-19 pandemic and the US Federal Reserve’s rampant money printing pushed inflation well past the central bank’s 2 per cent target.
In February, US consumer price inflation came in at 6 per cent, having reached a high of 9.1 per cent in June.
On top of this, the dollar is in danger of losing its dominance in the global monetary system. Having served as the primary global reserve currency since the end of the Second World War, the greenback has conceded some of its strong position to up-and-coming global rivals.
In the past two decades, the US dollar has lost 12 per cent of its global market share, which now sits at 59 per cent.
The rise of China
This is due largely to the rising power of the Chinese yuan. Recently, Russia announced its intention to raise the percentage of its reserves held in yuan, while also beginning to trade directly between the Chinese currency and the Russian rouble, rather than using the US dollar as an intermediary.
As a result, the yuan has now replaced the dollar as the most traded currency in Russia, accounting for 23.6 per cent of Russia’s foreign exchange turnover in the first quarter.
Similarly, other leading nations have been shifting away from their reliance on the dollar.
Brazil — the largest economy in Latin America — recently agreed to start trading directly with China.
The Reserve Bank of India also recently permitted 18 countries, including Oman, Singapore and the UK, to open Special Vostro Rupee Accounts to settle payments in the Indian rupee.
In addition, China recently settled a liquefied natural gas deal with a French energy giant denominated in yuan for the first time.
The move marks a significant milestone in China’s bid to challenge the so-called “petrodollar” — the US dollar’s status as the dominant currency for global oil and gas trade.
عبدالرحمان زمین پیما
Author
آرمان جعفری
Author
