Recent banking unpleasantness
The crypto industry has had a difficult time integrating with the “tradfi” banking system pretty much forever. Some have been pushed to some pretty “hack” banking solutions in the past (and some of these “solutions” were in fact massive problems of their own, in some cases violations of account terms, and in other cases potentially criminal.). There were a limited number of banks actively courting cryptocurrency industry customers, That was the stead-state until a few weeks ago.
As Nic Carter has said, it’s sort of an “Operation Chokepoint 2.0” kind of thing at some level (government interests, via regulators, intentionally making it hard for crypto end customers by leaning on banks and other intermediaries, threatening increased scrutiny and enforcement if they don’t voluntarily reduce exposure to the sector.).
Silvergate got hit by FTX/Alameda (to a substantial degree), and then mostly appears to have gotten intentionally screwed by regulators, acting via GSEs (Federal Home Loan Bank), forcing Silvergate to repay $4.3B in loans immediately. As a result, Silvergate then went on to “voluntary” liquidation.
There’s also the effect of going from 0% interest rate environment to 5% interest rate environment — all banks seem to have gotten hurt by this, as they were to some extent by regulations obligated to buy short-term treasures which have decreased in value throughout 2022.
There’s more crypto and tech-specific stuff, and maybe just enough of a catalyst to cause a bank run at SVB, which then (as with other bank runs) becomes self-perpetuating. Right now there’s the fun game theory of (3,3) VCs arguing for leaving funds with SVB/funds safu/don’t perpetuate the run, vs. others advising companies to pull their funds out ASAP so they don’t get stuck. For an operating business, having most of your funds with a bank which is forced to wind down might present serious operational problems even if no funds actually lost — just being unable to access funds for a week, potentially missing a payroll cycle, etc. is more pain than I’d be willing to accept to “show loyalty to a great financial institution who has always helped Silicon Valley tech companies, founders, and funds…”. I’d be fine with saying that while also pulling all my funds first, though.
This has definitely been an unpleasant day for a lot of founders/CEOs/CFOs scrambling to reassess how they bank, which normally is one of the more boring aspects of a startup.
(Personally, I don’t love any banks. I believe in keeping multiple parallel fully-functional and funded bank accounts just in case a bank decides to freeze my account for random operational reasons; having zero access to funds would be unacceptable. Also a big fan of self custody of at least some assets, although there are operational/security concerns with that as well.)
Signature NY is the other “big” crypto bank; they also have exposure to NY commercial real estate and some other stuff one might not really ideally want exposure to. The problem is, for operational crypto entities like exchanges, there aren’t a whole lot of banks willing to take their business (it’s easier for less-transactional crypto industry businesses).
Lots of people much smarter than me (e.g. Naval) are saying there’s “no chance” the Fed would allow depositors to lose money, even above the $250k limit per depositor (which is really easy to exceed as a business, even a startup, which raises money every few years…). I hope this is correct. Other people advising keeping treasuries in money market funds consisting of US Treasuries in ways which are protected from loss; who would have thought that treasury management is a thing….
The neobanks look more attractive by the day (Mercury, Brex, etc.); they make it easier to spread risk across multiple back-end banks, but they have less control over the banking relationship with the end customer than if they were Actual Banks themselves. Mostly for me with moderate balances and higher transactional requirements, the tradeoff is well worth it, but I’d probably use something treasury-backed for my actual business treasury. Not a financial advisor or lawyer, not financial or legal advice.
Ultimately, this is all probably good for crypto. I trust Bitcoin more than any single financial institution already; I probably trust the entire US financial system more in aggregate, but that trust erodes every day. Mostly I’m concerned about the “Thanksgiving dinner” problem for the year-old turkey — every day the farmer is nice and feeds you, until one day you feed him.