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Speaker 1: This is Bloomberg Crypto, a daily Bloomberg Ihad podcast, and

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Speaker 1: I'm Stacy Marie Ishmael, Managing editor of Crypto for Bloomberg News.

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Speaker 1: It's Monday, January. Hello listeners, this is Stacy Marie with

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Speaker 1: a quick bit of housekeeping before we dive into the

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Speaker 1: latest episode. Last week, the crypto under Genesis files for bankruptcy.

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Speaker 1: For the very latest news on what's happening there, go

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Speaker 1: to Bloomberg dot com, slash Crypto or check out the

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Speaker 1: Bloomberg Crypto News Lato. In the meantime, we'll have much

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Speaker 1: more on that on a later episode this week. Like

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Speaker 1: many crypto and crypto adjacent firms, traditional banks that diversified

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Speaker 1: into the sector and the asset class have struggled during

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Speaker 1: this crypto winter, and that's been true even before FTX

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Speaker 1: declared bankruptcy in November two. We'll find out actually how

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Speaker 1: many of these institutions are doing in the coming weeks,

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Speaker 1: as they'll all start to report earnings, and we will

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Speaker 1: of course be reporting on them here at Bloomberg. But

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Speaker 1: in the meantime, it's fair to say that a lot

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Speaker 1: of the banks that got into crypto benefited when prices

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Speaker 1: were rising and have struggled since last spring because the

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Speaker 1: digital assets sector has just been on a downward trajectory.

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Speaker 1: Here today, I'm delighted to be joined by my colleague

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Speaker 1: Max Reyes, who is a Bloomberg report who covers, among

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Speaker 1: other things, many of these crypto banks. We've seen stuff

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Speaker 1: in this genre before. I don't think we've seen this

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Speaker 1: exact movie before, so it's hard to guess, and you know,

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Speaker 1: I'm kind of remiss to throw a speculation out there,

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Speaker 1: but I think the big thing we're gonna see more hardship,

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Speaker 1: and the other question is our regulator is going to

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Speaker 1: take more decisive action? Are going to see more regulatory action? Max?

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Speaker 1: Welcome to the show. Thank you so much for having me.

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Speaker 1: Glad to be here. What is it that you do

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Speaker 1: with Bloomberg? Exactly? I cover financial services, both banks, insurance,

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Speaker 1: a little bit of everything, and like everyone else, I've

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Speaker 1: been kind of press ganged into coverage of FTX and

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Speaker 1: the fallout there, and it sort of ties to the

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Speaker 1: traditional world of finance. Now, what exactly has been happening

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Speaker 1: in the world of crypto and the world of traditional

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Speaker 1: finance that you are in fact responsible for that has

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Speaker 1: led to your bylines popping up on lots of stories

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Speaker 1: that have crypto in them. What's interesting about crypto is

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Speaker 1: that even though nominally it's about moving away from centralization,

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Speaker 1: moving away from fiat currency, to get into crypto and

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Speaker 1: to bring retail customers into it, you need to have

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Speaker 1: a place to put US dollars and you need to

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Speaker 1: have a way to send US dollars to other people

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Speaker 1: in the space. And that's where traditional banks come in,

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Speaker 1: and we're talking about primarily regional banks, smaller banks that

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Speaker 1: decided they'd be willing to forge these business relationships with

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Speaker 1: cryptocurrency companies. That's exchanges, that's miners in some cases, that

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Speaker 1: sort of thing, and say, we have a platform, we

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Speaker 1: have a banking license or a charter. We can essentially

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Speaker 1: be a depository, write a place for you to put

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Speaker 1: your cash that you get from these operations, your U

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Speaker 1: S dollars, your euros in some cases, and you can

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Speaker 1: use our platform to send this fiat currency to other people.

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Speaker 1: We're not going to touch your crypto unless you know,

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Speaker 1: cases of custody. But primarily what we're talking about as

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Speaker 1: a sort of system that allowed this some folks called

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Speaker 1: an on ramp or an off ramp for U S

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Speaker 1: dollars in crypto to kind of go back and forth

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Speaker 1: between these two otherwise segmented, segregated financial systems. So it

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Speaker 1: sounds like what you're saying is a lot of the

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Speaker 1: banks that you cover their exposure to crypto came not

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Speaker 1: through oh, we're buying a bunch of bitcoin, but we're

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Speaker 1: going to have customers and clients who are themselves crypto

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Speaker 1: companies or crypto exchanges or crypto lenders, and we will

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Speaker 1: be their banking partner. Exactly. That's exactly the case. There were, however,

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Speaker 1: and there are still a couple of institutions that do

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Speaker 1: have more direct exposure to crypto. How does that work

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Speaker 1: in those cases? There there are a few examples. One

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Speaker 1: thing that some folks do, primarily Silvergate, is they lend

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Speaker 1: against bitcoin as collateral. They'll take your bitcoin, not literally

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Speaker 1: take it, but they'll say, we'll give you a loan,

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Speaker 1: it will be collateralized by this bitcoin that you're handing

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Speaker 1: to us, and then if the bitcoin value dips between

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Speaker 1: a certain level, you'll receive a margin call from us.

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Speaker 1: You know, we'll start to liquidate your position. That's that's

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Speaker 1: one thing we've seen. The other hand. And this is

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Speaker 1: some of the more traditional players have gotten into this

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Speaker 1: or want to get into this. We're talking B and

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Speaker 1: Y melon U S. Bank is custody and that means

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Speaker 1: they're literally just saying you hand us, not the literal keys.

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Speaker 1: There are literal keys involved, but the metaphorical keys to

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Speaker 1: your cryptocurrency. Will hold on to that for you, will

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Speaker 1: keep it safe for a bank. That's what banks do.

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Speaker 1: People have been handing us valuable stuff forever, and now

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Speaker 1: we're just gonna do that with these virtual tokens. As

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Speaker 1: you put it, like very very traditional banking type responsibilities.

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Speaker 1: Why did it all go wrong? That's I think the

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Speaker 1: the answer has three letters and it's f t X right.

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Speaker 1: But uh, to be more specific, the the issue here

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Speaker 1: for for these banks, and specifically the ones that are

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Speaker 1: dealing with i'd say turmoil trouble are the folks who

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Speaker 1: really double down on crypto. We're talking Provident Bank, We're

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Speaker 1: talking most specifically silver Gate, Um other folks who have

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Speaker 1: seen shares definitely weaker, not to the same degree, but

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Speaker 1: definitely weakness. They're like Signature Bank. The issue is that

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Speaker 1: there's been panic in the crypto markets because FTX revealed

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Speaker 1: that someone who are an organization that was thought to

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Speaker 1: be one of the most stable players in the space

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Speaker 1: wasn't right. You know this this the foundations were not there,

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Speaker 1: and so you had a panic. You had, in silver

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Speaker 1: Gates case, a bank run which people were pulling deposits

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Speaker 1: out of the bank because they were worried. And there's

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Speaker 1: also just less um, you know, treading, less activity in

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Speaker 1: the world of crypto because folks are losing money. Right,

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Speaker 1: So that combined together means that if you are anyone

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Speaker 1: who has doubled down on crypto as your your bread

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Speaker 1: and butter, the main thing you're doing, you're gonna be

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Speaker 1: in find, you know, a tough spot. In January, silver

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Speaker 1: Gate announced reorganization and and keep in mind as well,

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Speaker 1: that not the only ones talking about layoffs and having

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Speaker 1: to cut spending. We're seeing this across various folks that

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Speaker 1: operate in the crypto space. It's just that specific to

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Speaker 1: these banks, they're offering traditional financial services. They have a

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Speaker 1: bank charter, they have f d I C, insurance, UH

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Speaker 1: and other sort of access to funds that a traditional

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Speaker 1: crypto player that doesn't have a bank charter would would

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Speaker 1: not be able to to touch those banks because of

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Speaker 1: their charters. Because they have these you know, they have

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Speaker 1: access to federal pools of money that other crypto donative

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Speaker 1: organizations don't have access to. They're essentially able to like

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Speaker 1: bail themselves out using government or federal funds, and that

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Speaker 1: that's happening, even though those bailouts came because they were

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Speaker 1: speculating on an asset class that not every regulator is

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Speaker 1: super happy for them to be involved with in the

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Speaker 1: first place. What what's happening there? What is the sentiment

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Speaker 1: from regulators around this right now? Yeah, that's definitely one

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Speaker 1: major criticism, one that's definitely been voiced by a lot

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Speaker 1: of folks, especially short sellers, looking at these stocks. The

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Speaker 1: the answer on what regulators are saying is kind of disappointing,

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Speaker 1: but it's it's sort of not much. Essentially. The the

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Speaker 1: word from the SEC, the FED, and the fd I

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Speaker 1: C which put out a joint letter in January, is

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Speaker 1: be very cautious. You know, they're they're really worried about

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Speaker 1: the potential systemic risks presented by these digital tokens if

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Speaker 1: the contagion from crypto were to spread into the traditional

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Speaker 1: banking system. Folks would rather see this happen at these

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Speaker 1: smaller regional players that are not you know, important to

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Speaker 1: the kind of fabric of the financial system, the global

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Speaker 1: financial system. But that's kind of cold comfort to folks

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Speaker 1: who are worried about taxpayer dollars going to cover what

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Speaker 1: is a very risky and untested space. Up next, you'll

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Speaker 1: hear more from x Rays on what we can expect

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Speaker 1: in three as it relates to these crypto exposed banks.

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Speaker 1: This is a fact that I didn't know, but Provident

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Speaker 1: Bank one of the ones that you mentioned, it's first

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Speaker 1: chairman fourth under George Washington in the Revolutionary War. This

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Speaker 1: is like, this is a bank that has had generations

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Speaker 1: of relationships and they've kind of crushed on their crypto exposure.

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Speaker 1: So it's not that these banks are new. They have

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Speaker 1: had successful businesses in some cases for you know, hundreds

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Speaker 1: of years. Why did they get into crypto in the

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Speaker 1: first place, Like what was the attraction to them? The

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Speaker 1: big thing that you have to keep in mind when

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Speaker 1: it comes to regional banks, and that's you know, these

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Speaker 1: banks that are smaller that are focused on specific states

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Speaker 1: or specific chunks of the country, is that they've had

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Speaker 1: a lot of competition for a long time until recently,

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Speaker 1: especially during the pandemic, they were dealing with this very

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Speaker 1: low rate environment. They were dealing with this inability to

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Speaker 1: keep up with spending on technology and resources, encroachment by

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Speaker 1: the largest US banks. So they had to specialize. And

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Speaker 1: that's something a lot of analysts have talked about, something

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Speaker 1: that regulators are aware of. And sometimes that specialization comes

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Speaker 1: in the form of focusing on real estate. In a

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Speaker 1: case of Silicon Valley Bank, you know, they really doubled

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Speaker 1: down on their interests in funding and working with startups

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Speaker 1: and venture capital funds and that sort of thing. And

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Speaker 1: in the case of these banks were talking about right now,

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Speaker 1: they kind of hitch their wagon to cryptocurrency because it

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Speaker 1: was an area that other folks, other banks were not

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Speaker 1: dealing with. It was an area where they thought if

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Speaker 1: they took the right risk attitude, the right stance, they

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Speaker 1: could do it in a way that would be profitable

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Speaker 1: without introducing too much risk. But what we've seen in

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Speaker 1: several cases, right is that I guess you could say

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Speaker 1: the foundations of the industry were not there to support

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Speaker 1: this sort of let's call it an eggs in one

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Speaker 1: basket strategy. It has not been as sustainable or sustainable

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Speaker 1: to the extent that would want the business model of

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Speaker 1: a financial institution to be. For some of these organizations

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Speaker 1: when they and I'll use silver Gates as an example,

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Speaker 1: came out and said, Hey, we're going to issue our

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Speaker 1: own stable coin, or we're going to become, you know,

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Speaker 1: the leading experts on how you custody crypto assets for customers,

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Speaker 1: which was kind of one of the press releases put

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Speaker 1: out by US Bank, which is one of the largest

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Speaker 1: regional banks in the in the United States. What does

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Speaker 1: three hold for the prospects of these kinds of banks,

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Speaker 1: especially as it relates to crypto. Yeah, if I if

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Speaker 1: I knew, I don't think i'd be in the certain necessarily.

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Speaker 1: I think we're going to see a lot more just

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Speaker 1: of this pain, this blood letting. I'm not going to

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Speaker 1: kind of I don't have a crystal ball to look into,

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Speaker 1: and I don't think I'm allowed to make any outsized

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Speaker 1: projections as a reporter here at Bloomberg. But fundamentally, what

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Speaker 1: people are going to be looking for is whether or

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Speaker 1: not these banks can I guess whether the storm let's

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Speaker 1: call it. If you look at silver Gate, it's track record,

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Speaker 1: this isn't the first Crypto Winter it's gone through. But

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Speaker 1: you know, when the last time this came around, to

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Speaker 1: my knowledge, they weren't yet public, right, So it's the

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Speaker 1: kind of thing where not only is the bank larger

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Speaker 1: in scale and kind of prominence, but also there are

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Speaker 1: just more eyes on it. In the last Crypto Winter

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Speaker 1: also did not feature the collapse of this player seen

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Speaker 1: as the adult in the room right in the in

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Speaker 1: the form of fd X. So I think it's hard

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Speaker 1: to draw comparisons or through lines. Uh. You know, I

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Speaker 1: hate using the word I'm precedented, and I'm pretty sure

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Speaker 1: if I use it again and a sentence, I get

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Speaker 1: like a golden watch or a free McDonald sand which.

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Speaker 1: But we've seen stuff in this genre before. I don't

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Speaker 1: think we've seen this exact movie before, So it's hard

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Speaker 1: to guess, And you know, I'm kind of remiss to

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Speaker 1: throw a speculation out there. But I think the big

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Speaker 1: thing we're gonna see more hardship, And the other question

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Speaker 1: is our regulators is going to take more decisive action.

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Speaker 1: Are going to see more regulatory action. We've obviously already

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Speaker 1: seen regulators looking to f t X, We've yet to

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Speaker 1: see specific investigations of these financial institutions when it comes

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Speaker 1: to their dealings with crypto. But there are questions about it.

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Speaker 1: Lawmakers have raised questions and letters. Senator Warren among others,

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Speaker 1: have issued letters asking questions. Yeah. But and and that's

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Speaker 1: the thing is that for the most part, what we're

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Speaker 1: talking about amounts to two questions raised by folks kind

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Speaker 1: of outside the rooms, but not necessarily the regulators the

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Speaker 1: banks themselves. And I think that's what we're all waiting on,

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Speaker 1: you know, is whether or not another shoe is going

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Speaker 1: to drop in that on top of these kind of

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Speaker 1: really difficult market and fundamental challenges, whether or not regulators

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Speaker 1: will step up and say something. And I think that's

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Speaker 1: one of the big questions that I'm going to be

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Speaker 1: you know, pondering and hopefully writing stories about. Yes, yes, yes,

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Speaker 1: I don't just stand in a room and think I've

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Speaker 1: been telding thoughts but not file any stories. Yeah. I wish,

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Speaker 1: I wish our jobs would be so much easier if

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Speaker 1: we only have to think and not then write things down. Um, Max,

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Speaker 1: thank you so much for being on the show. Yeah,

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Speaker 1: thank you for having me. That was Bloomberg Reports to

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Speaker 1: the Max. Rez You can find more of his reporting

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Speaker 1: in the Bloomberg Terminal and on Bloomberg dot com, and

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Speaker 1: be sure to check out art twice weekly Newslesso, which

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Speaker 1: is also called Bloomberg Crypto. This is Bloomberg Crypto, a

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Speaker 1: daily podcast from Bloomberg and I Heart Radio. For more

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Speaker 1: your comments, questions, or suggestions for the show to Crypto

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Speaker 1: at Bloomberg dot net. The supervising producer of Bloomberg Crypto

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Speaker 1: is Vicky Vergelina. Our senior producer is Janet Babin. Our

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Speaker 1: producers are Mohammed Faruk and Sharon Barriro. Our associate producers

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Speaker 1: are Ty Butler and Moses on Them. Desta wonder At

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Speaker 1: is our engineer. Original music by Leo Sidrn. I'm Stacy

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Speaker 1: Marie Shmal. We'll be back tomorrow