Flight to safety? Crypto-friendly banks could capitalize on FTX meltdown.

It’s trendy to compare the recent troubles at the cryptocurrency exchange FTX with Lehman Brothers’ legendary fall, which sent shock waves across the financial services sector in 2008 and helped spark a systemic crisis.

But bankers who have been developing and offering services for cryptocurrency investors and crypto businesses describe FTX’s bankruptcy as a more isolated event.

And some bank executives actually see a silver lining: Investors and crypto businesses are likely to want to work with more heavily regulated players like banks, they say.

“At one level, this is nothing new,” said Brad Scrivner, CEO of Vast Bank in Tulsa, Oklahoma. “Companies in multiple industries in many different time frames have had liquidity issues and concentration issues, and things like this happen. This is one of the reasons that high-net-worth people and institutions want to see a highly regulated, national-bank custodian like Vast.”

Scrivner cited a survey of 2,000 consumers that The Ascent, a Motley Fool company, released in June. It found that 62% would consider buying more crypto if they could store it in a bank account. 

For the past 18 months, the $852 million-asset Vast has been letting its customers buy and sell 12 kinds of cryptocurrencies through a relationship it has with the crypto exchange Coinbase. Coinbase doesn’t own the assets and can’t leverage them, and it doesn’t issue its own digital cryptocurrency, Scrivner said.

“Our customers’ assets are their assets, and we are merely following their instructions to buy, sell and hold,” Scrivner said. “At one level custody and safekeeping [of digital assets] is boring, something that banks have been doing for centuries. But I think customers, particularly those that are wanting to get involved, the crypto curious, want to see a regulated entity — then they will feel comfortable getting involved in it.”

Scrivner declined to say how many customers use this option, but he said the number is growing, even though the bank hasn’t done any marketing for it.

“The demand is there,” he said. “We’re seeing it.” 

‘Glad to see the grifters go’

The full details of what has happened at FTX over the past week and a half are still coming out, and some are in dispute. 

On Nov. 2, CoinDesk posted a story about FTX, which was one of the largest cryptocurrency exchanges, and Alameda Research, a large trading firm, both owned by Sam Bankman-Fried. CoinDesk editors reviewed Alameda Research’s balance sheet and found it was “full of FTX – specifically, the FTT token issued by the exchange that grants holders a discount on trading fees on its marketplace,” the publication stated. “While there is nothing per se untoward or wrong about that, it shows Bankman-Fried’s trading giant Alameda rests on a foundation largely made up of a coin that a sister company invented, not an independent asset like a fiat currency or another crypto.”

On Nov. 6, rival cryptocurrency exchange Binance’s CEO, Changpeng Zhao, announced that “due to recent revelations that have come to light,” Binance would be selling all remaining FTT tokens it held, worth roughly $2.1 billion. 

This helped cause a run on FTX, which the company couldn’t handle. FTX filed for bankruptcy on Friday and CEO and founder Sam Bankman-Fried resigned. Recent reports have stated that FTX owes money to more than 1 million investors.

Caitlin Long — who previously worked at Salomon Brothers, Morgan Stanley and Credit Suisse and is now the CEO of Custodia Bank in Cheyenne, Wyoming — said she has long disapproved of the overleveraging on Wall Street and views that mentality as a key cause of trouble for FTX, Alameda and other firms leveraging cryptocurrency.

“I’m glad to see the grifters go and glad to see the leveraged business models flushed, because I’ve consistently said for years, you cannot safely leverage bitcoin more than one to one ever, period,” Long said. “And those that do are insolvent from the moment that they do, and there’s no such thing as a liquidity crisis that’s not a solvency crisis. If you are illiquid, you are insolvent. A lot of smart money is having to learn that lesson the hard way.”

Some exchange-traded-fund and derivatives traders have become bad actors in crypto, she said. 

“When they came, what they saw was an unregulated, highly volatile asset class that they could apply their trading tools to,” Long said. “And they’re used to trading in assets that have a lender of last resort. They’re not used to trading in assets like bitcoin that do not, and they just had their head handed to them, and they deserved it.”

Banks exposed to FTX

The banks most immediately affected by FTX’s bankruptcy are those that work with it, like Silvergate Capital in La Jolla, California. FTX was a user of Silvergate Exchange Network, a real-time payments platform that the $15 billion-asset bank created for cryptocurrency exchanges and investors.

On Friday, CEO Alan Lane said Silvergate’s total deposits from all digital-asset customers totaled $11.9 billion, of which FTX represented less than 10%. 

“Silvergate has no outstanding loans to nor investments in FTX, and FTX is not a custodian for Silvergate’s bitcoin-collateralized SEN Leverage loans,” he said in a statement. “To be clear, our relationship with FTX is limited to deposits.”

In a later email exchange, Lane said his bank will not be adversely affected by FTX’s travails. 

“Silvergate has more than 100 exchange clients and more than 1,000 institutional investor clients that rely on the Silvergate Exchange Network for the 24/7 U.S. dollar operations of their business and trading strategies,” he said. “As we look back historically, the positive or negative trend for any single client has not had a material impact on our business.”

Coinbase and its customers are not in any direct danger of liquidity or credit risk, a spokeswoman said in a statement on Monday. 

“We have very little exposure to FTX, and we have no exposure to its token, FTT,” she said. “Currently we have $15 million worth of deposits on FTX to facilitate business operations and client trades. We have no exposure to Alameda Research, and we have no loans to FTX.”

Signature Bank in New York also has a relationship with FTX. In October 2021, FTX announced that it had integrated the $114.5 billion-asset Signature’s instant Signet deposits and withdrawals for institutions. 

The bank declined to grant an interview or offer a comment for this story.

More rules coming

Regulators are going to be asking a lot of extra questions of all cryptocurrency players, Long predicted. But she is optimistic about her plans to offer bitcoin and ether custody at Custodia, which has a special-purpose depository institution charter from the state of Wyoming and has been waiting for two years for approval to get a master account at the Federal Reserve. Custodia aims to provide faster payments services for corporate treasurers.

“Custodia has zero interest in trading digital assets,” Long said. “We’re here for the payment technology.” 

In Long’s view, there are two camps among Washington policymakers right now. One believes there’s nothing to crypto and that it will burn itself out. The other recognizes it’s a real technology and that there’s a need to do something to keep the bad players out and greenlight the good players. 

“I think that second camp is going to win, but I don’t know for sure,” Long said. “I think they will end up regulating such that the good players get in and the bad players will be flushed out.” 

At Vast Bank, Scrivner shares this optimism.

“We believe that a regulatory-responsible approach is one that will win,” Scrivner said. “We’re not leveraging our customers’ assets. We don’t take any balance sheet risk.”

FTX’s troubles have created price volatility, he said.

“But we’re not sitting there worried about the price of digital assets changing,” Scrivner said. “We are a custodian; we are a safekeeping location for our customers’ digital assets. We have chosen to partner with a public company, the largest exchange in the United States by volume in Coinbase.”

Failures like FTX’s “remind customers of why we’re here in the first place and why that regulatory environment is there,” Scrivner said.

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