A new administration has taken power and shifted the regulatory winds. No where is this shift being felt more than in the crypto space. The administration has moved swiftly to reverse the aggressive stance that had been taken against the crypto industry over the previous 4 years. Those actions include the reversal of the tightened accounting and reporting standards of digital assets from SAB121, which opens the door for banks to begin supporting crypto again. This was echoed by the FDIC this week as the agency announced it is “actively reevaluating” its supervisory approach to crypto-related activities.
“Looking forward, we are actively reevaluating our supervisory approach to crypto-related activities. This includes replacing Financial Institution Letter (FIL) 16-2022 and providing a pathway for institutions to engage in crypto- and blockchain-related activities while still adhering to safety and soundness principles.” - Acting FDIC Chairman Travis Hill
So, it appears crypto is back on the menu.
But is it actually “back”?
How “back” is it and for how long, and what could that mean for banks?
Before diving in, we should probably recall why it needed to come “back” in the first place; in other words, why did crypto go away? Here’s a rundown of a few key events that impaired the crypto space in the last few years:
The crypto bubble hit its crescendo in late 2021 and then burst, again. Prices of all digital assets - Bitcoin, NFTs of silly images, Digital Autonomous Organizations (DAOs) - all crumbled, with Bitcoin plummeting from ~$69k to ~$15k per coin, other assets falling 99%+.
Companies across the crypto industry imploded due to malfeasance and/or incompetence:
The stablecoin pair Luna and Terra imploded because their ecosystem was structurally unsound, evaporating $60B in direct paper wealth and triggering wider losses across the ecosystem (INCOMPETENCE)
The prominent crypto trading firm, Three Arrows Capital, BlockFi, and Celsius became insolvent as the Grayscale Bitcoin Trust (GBTC) premium trade inverted, leading to billions in losses for themselves and customers (INCOMPETENCE AND MALFEASANCE)
FTX declared bankruptcy and was revealed to be a giant fraud that was using customer funds to cover sister company Alameda’s trading losses. Sam Bankman-Fried goes to prison (MALFEASANCE x100 and INCOMPETENCE)
The run on Silicon Valley Bank, and the Silvergate Bank and Signature Bank failures and surrounding regulatory actions hollowed out crypto company access to US banking infrastructure
Regulators provided unambiguously firm guidance against banks considering crypto offerings
The crypto industry managed to survive all of this and has steadily rebounded since early 2023, with a few notable milestones and activities:
Trump signaled during his campaign that he would be the crypto (or Bitcoin) president, aligning with the industry
Following the election, Bitcoin topped $100k per coin and has remained near or above that point since
Trump has signed a series of executive orders related to crypto, including the exploration of a Strategic Bitcoin Reserve (possibly Crypto Reserve)
The SEC has overturned SAB121, allowing banks to engage with crypto
Trump launched the $TRUMP “meme” coin, reaching ~$70B in market cap within 48 hours. The meme coin phenomenon continues as the Coinbase CEO claims 1M new coins are being created EACH WEEK
A lot is happening in crypto and you could argue that nearly everything that is happening in crypto is not a good thing. You would get no pushback from me.
What you can’t deny is that the winds have changed in the most dramatic sense possible and the amount of value that is being created, traded, and destroyed represents an immense opportunity for any bank that can steel themselves enough to partake. The result of the previous administration’s stance towards crypto and banks has left a greenfield opportunity for banks that want to step up and service the industry. The depth and scope of the regulatory oversight was so impactful that the opportunities available today warrant everyone taking a hard look.
Which outcomes are you targeting with your strategic priorities? There’s likely a crypto opportunity for you:
New commercial clients: Thousands of crypto businesses have been without access to banking. Crypto businesses are signaling more onshoring bringing new customers, payments, and deposits.
Grow retail banking: Millions of Americans own crypto. Most is held on exchanges like Coinbase or in investment apps like Robinhood, and the crypto-wealthy often secure their assets using decentralized wallets. Investments have been shown to drive more deposit engagement with the bank (like Concept Lab grad Eko). Wealth could also act as a custodian of crypto on behalf of their clients.
New sources of NII: Payments into and out of crypto, compliance-as-a-service, and securing crypto could all be sources of new non-interest income, where banks would add significant value for their crypto and non-crypto customers.
As the industry continues to mature and the intersection of crypto and banking mature, more opportunities will arise. The path forward is to start by acknowledging the opportunity and welcoming environment and then get to work figuring out how to address the real and complex challenges that make banking crypto so difficult in the first place. The Alloy Labs Alliance has collaborated to tackle challenging concepts before, like we are currently doing with Identity, and we are positioned to explore crypto opportunities and challenges as well in a measured way with risk management at the forefront.
Is crypto back to stay? It’s too early to issue a long-term forecast, but there is no doubt that new opportunities abound to apply new solutions to real customer pain points.