Banks engaged in cryptocurrency-related assets are cutting costs and pulling back from the space after heightened regulatory scrutiny and deposit losses.
Several banks experienced heavy deposit losses related to digital assets in 2022 as prices and volumes declined and FTX Trading Ltd., BlockFi Inc. and Voyager Digital Ltd. filed for bankruptcy.
Federal regulators issued a joint statement this month warning of crypto-asset risks to banking organizations including volatility, susceptibility to run risk and fraud. Regulators indicated they would supervise bank organizations exposed to crypto-asset-related risks and carefully review any proposals to engage in the space.
Runs on digital asset deposits
Provident Bancorp Inc. said in November 2022 that it would be hit with an estimated $27.5 million in losses on loans due to the decline in the crypto industry and that the losses could exceed that estimate.
The company also entered an asset purchase agreement under which it repossessed cryptocurrency mining rigs as collateral in exchange for the forgiveness of a $28 million loan.
Silvergate Capital Corp., which is primarily crypto-focused, reported a 68% decline in digital asset deposits to $3.8 billion from $11.9 billion during the fourth quarter of 2022. The company announced a 40% workforce reduction after its stock fell 46% in early trading Jan. 5.
Silvergate's survival of the $8 billion liquidity run was "mind-boggling," but its risk mitigation strategy proved to be a success, Don Musso, the president of FinPro, a bank financial planning firm, said in an interview.
"Crypto really is in a nuclear winter, but in reality, it's back just to where it was pre-COVID," Musso said. The firm is depending on other banks pulling back from the space and leaving it as one of the few remaining major players, he added.
On a Jan. 5 investor call, Silvergate CEO Alan Lane said the industry was undergoing a "crisis of confidence," but suggested the company's concentration on digital assets could make it an attractive M&A target in the future. The firm said on its fourth-quarter 2022 earnings call that it will cut costs, including ending certain noncore customer relationships and eliminating overly costly or complex products.
Pulling back from crypto
Metropolitan Bank Holding Corp. opted to completely exit its crypto-asset-related business vertical earlier this month, but the business is only 1.5% of the company's revenue, and 6% of total deposits, so the expected financial impact of the exit is minimal.
The company began to pull back from and de-emphasize crypto early in 2018 during the previous industry downturn largely because it was unwilling to pay interest on digital deposits while other companies were, Keefe Bruyette & Woods analyst Chris O'Connell said in an interview.
"As everybody else ramped up, Metropolitan didn't actually really add any customers in this space," O'Connell said.
Metropolitan's digital asset deposits still grew in recent years as prices and volumes in crypto rose, but those deposits took a hit in 2022, and the increased regulatory scrutiny only made such deposits even less desirable, he said.
"This is just kind of pulling off the Band-Aid," O'Connell said. "It's just not worth the amount of resources that you would have to shift to support those customers."
Another firm, Signature Bank, said in December 2022 that it would reduce crypto deposits by $8 billion to $10 billion between the fourth quarter of 2022 and the first quarter of 2023 after the company's crypto deposits fell by more than $6 billion.
"It just created a lot of headline news and a little bit of volatility in their funding," Piper Sandler analyst Mark Fitzgibbon said. "They want to shrink it down to a level where they feel like it's just more manageable."
Still, executives emphasized that Signature will not exit cryptocurrency entirely. Signet, Signature's blockchain payments network, is a driver behind the company's decision not to exit, Fitzgibbon said.
"They think this digital payments business can be used not just for crypto, but for lots of businesses," Fitzgibbon said.
Next steps for regulators
This month, Signature CEO Joseph DePaolo called for actionable guidance from regulators to eliminate unqualified players and restore confidence in digital assets banking as the company is eager to make enhancements to Signet.
"It puts us in a difficult position as to what we do next, and not knowing regulation-wise what's going to happen puts us really behind everyone else," DePaolo said.
Regulators are "hitting hard" with an "all but explicit moratorium" on bank involvement in crypto, but if regulators enact risk mitigation strategies and guidance around cryptocurrency, more banks may begin to enter the space again, Musso said.
Until then, FinPro is advising its clients to conduct an analysis before entering the crypto space, and to limit involvement to holding crypto-assets as deposits while avoiding lending on the value of cryptocurrency.
"I certainly wouldn't be extending cash out with crypto collateral sitting in the bank," Musso said. "I don't think banks need to be early adopters here. I think that's probably too big a risk."