2023-06-19 07:19:06
1. What’s an ‘on-ramp’ and ‘off-ramp’?
An on-ramp is somewhere investors can exchange regular currencies such as US dollars or euros from their bank accounts for cryptocurrencies such as Bitcoin or Ether. An off-ramp swaps crypto assets for traditional money. This mostly happens via crypto exchanges such as Coinbase and Kraken as they accept money through bank transfers or credit card payments. It’s possible to trade crypto tokens “peer to peer,” without using a regular bank, but as very few products or services can be bought with digital currency, investors usually need to off-ramp before the proceeds can be spent.
2. Where do banks come in?
Crypto exchanges have been able to function as gateways between real and digital money because of their partnerships with banks such as Silvergate Capital Corp. and Signature Bank. The exchanges relied on services like the Silvergate Exchange Network and Signature’s Signet to allow crypto clients to make real-time payments in dollars at any time, seven days a week, matching crypto’s own 24/7 trading hours. Heightened scrutiny by regulators meant other US banks were hesitant to fill the gap, leaving many crypto firms searching for alternative partners in places with looser supervision such as Switzerland and the United Arab Emirates. In the UK, companies were turning to payment-service providers to bridge the gap. In the US, crypto firms were going to a handful of smaller regional lenders to open bank accounts.
3. Why are the ‘ramps’ disappearing?
A confluence of misfortunes felled Silvergate, Signature Bank and another tech-focused lender, Silicon Valley Bank, including the end of rock-bottom interest rates. It was just the latest challenge in the tumultuous history of crypto markets. Their volatility helped hasten the demise of the two banks, after clients withdrew crypto-related deposits. In June, Binance.US said it won’t be able to process deposits or withdrawals in dollars — losing its US dollar on-ramp and off-ramp — after it was sued by the Securities and Exchange Commission. It encouraged customers to trade using stablecoins, digital tokens that are designed to mirror the value of a so-called fiat currency such as the dollar and a way for crypto traders to store value.
The demise of Silvergate and Signature left crypto firms struggling to find new banks for depository and payment services. Some financial firms imposed lengthy application procedures, turning away smaller companies and retail platforms, and in some cases shutting the door on crypto businesses altogether, according to industry participants, investors and bank executives. That was one reason why it was getting harder to trade digital assets like Bitcoin by early April, with one measure of how easily the largest cryptocurrency can be bought or sold falling to a 10-month low. That liquidity drop threatened to exacerbate Bitcoin’s notorious price volatility and suggested the token’s partial recovery from the “crypto winter” of 2022 may be built on weak foundations.
5. What does it mean for crypto regulation?
Banking regulators have long taken a dim view of crypto. Its volatility makes it a potential source of unsustainable losses for investors and instability for the wider financial system. Critics say it can be used by bad actors to shift around their ill-gotten gains free from the checks and oversight required of regular banks. And it’s hard to verify the value of reserves that can serve as collateral when a crypto asset or institution suffers a crisis of confidence. Regulators were now looking to fix the weak links in the US banking system revealed by Silvergate, Signature and SVB, and one of those is the exposure of smaller lenders to volatile crypto assets. It marks a turnaround for a government that, until recently, had sought a lighter-touch approach for smaller banks, to allow them to innovate in areas like digital currencies.
6. Could the bank failures sink crypto?
The crypto world is likely to face costly, lengthy contortions to move funds to and from US banks, which could slow down settlements. A similar scenario played out in India in early 2022. Trading volume fell after several crypto exchanges had to suspend rupee deposits because banks and payment gateways pulled support for money transfers. With US regulators apparently determined to slash banks’ exposure to crypto, by mid-year many crypto firms were searching for alternative banking partners. US investment in crypto may also suffer. Until recently, many of the country’s banks were experimenting with crypto and related blockchain technology, suggesting the new asset class may eventually go mainstream. That’s less certain now