WEBVTT - When Main Street Banks Dabble in Crypto

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<v Speaker 1>This is Bloomberg Crypto, a daily Bloomberg Ihad podcast, and

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

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

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<v Speaker 1>a quick bit of housekeeping before we dive into the

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<v Speaker 1>latest episode. Last week, the crypto under Genesis files for bankruptcy.

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<v Speaker 1>For the very latest news on what's happening there, go

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<v Speaker 1>to Bloomberg dot com, slash Crypto or check out the

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

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<v Speaker 1>more on that on a later episode this week. Like

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<v Speaker 1>many crypto and crypto adjacent firms, traditional banks that diversified

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<v Speaker 1>into the sector and the asset class have struggled during

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<v Speaker 1>this crypto winter, and that's been true even before FTX

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<v Speaker 1>declared bankruptcy in November two. We'll find out actually how

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<v Speaker 1>many of these institutions are doing in the coming weeks,

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<v Speaker 1>as they'll all start to report earnings, and we will

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<v Speaker 1>of course be reporting on them here at Bloomberg. But

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<v Speaker 1>in the meantime, it's fair to say that a lot

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<v Speaker 1>of the banks that got into crypto benefited when prices

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<v Speaker 1>were rising and have struggled since last spring because the

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<v Speaker 1>digital assets sector has just been on a downward trajectory.

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<v Speaker 1>Here today, I'm delighted to be joined by my colleague

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<v Speaker 1>Max Reyes, who is a Bloomberg report who covers, among

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

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<v Speaker 1>in this genre before. I don't think we've seen this

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

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<v Speaker 1>I'm kind of remiss to throw a speculation out there,

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

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<v Speaker 1>and the other question is our regulator is going to

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<v Speaker 1>take more decisive action? Are going to see more regulatory action? Max?

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<v Speaker 1>Welcome to the show. Thank you so much for having me.

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<v Speaker 1>Glad to be here. What is it that you do

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<v Speaker 1>with Bloomberg? Exactly? I cover financial services, both banks, insurance,

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<v Speaker 1>a little bit of everything, and like everyone else, I've

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<v Speaker 1>been kind of press ganged into coverage of FTX and

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<v Speaker 1>the fallout there, and it sort of ties to the

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<v Speaker 1>traditional world of finance. Now, what exactly has been happening

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<v Speaker 1>in the world of crypto and the world of traditional

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<v Speaker 1>finance that you are in fact responsible for that has

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<v Speaker 1>led to your bylines popping up on lots of stories

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<v Speaker 1>that have crypto in them. What's interesting about crypto is

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<v Speaker 1>that even though nominally it's about moving away from centralization,

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<v Speaker 1>moving away from fiat currency, to get into crypto and

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<v Speaker 1>to bring retail customers into it, you need to have

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<v Speaker 1>a place to put US dollars and you need to

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<v Speaker 1>have a way to send US dollars to other people

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<v Speaker 1>in the space. And that's where traditional banks come in,

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<v Speaker 1>and we're talking about primarily regional banks, smaller banks that

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<v Speaker 1>decided they'd be willing to forge these business relationships with

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<v Speaker 1>cryptocurrency companies. That's exchanges, that's miners in some cases, that

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<v Speaker 1>sort of thing, and say, we have a platform, we

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<v Speaker 1>have a banking license or a charter. We can essentially

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<v Speaker 1>be a depository, write a place for you to put

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<v Speaker 1>your cash that you get from these operations, your U

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<v Speaker 1>S dollars, your euros in some cases, and you can

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<v Speaker 1>use our platform to send this fiat currency to other people.

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<v Speaker 1>We're not going to touch your crypto unless you know,

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<v Speaker 1>cases of custody. But primarily what we're talking about as

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<v Speaker 1>a sort of system that allowed this some folks called

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<v Speaker 1>an on ramp or an off ramp for U S

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<v Speaker 1>dollars in crypto to kind of go back and forth

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<v Speaker 1>between these two otherwise segmented, segregated financial systems. So it

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<v Speaker 1>sounds like what you're saying is a lot of the

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<v Speaker 1>banks that you cover their exposure to crypto came not

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<v Speaker 1>through oh, we're buying a bunch of bitcoin, but we're

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<v Speaker 1>going to have customers and clients who are themselves crypto

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<v Speaker 1>companies or crypto exchanges or crypto lenders, and we will

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

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<v Speaker 1>and there are still a couple of institutions that do

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<v Speaker 1>have more direct exposure to crypto. How does that work

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<v Speaker 1>in those cases? There there are a few examples. One

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<v Speaker 1>thing that some folks do, primarily Silvergate, is they lend

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<v Speaker 1>against bitcoin as collateral. They'll take your bitcoin, not literally

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<v Speaker 1>take it, but they'll say, we'll give you a loan,

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<v Speaker 1>it will be collateralized by this bitcoin that you're handing

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<v Speaker 1>to us, and then if the bitcoin value dips between

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<v Speaker 1>a certain level, you'll receive a margin call from us.

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

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<v Speaker 1>one thing we've seen. The other hand. And this is

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<v Speaker 1>some of the more traditional players have gotten into this

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<v Speaker 1>or want to get into this. We're talking B and

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<v Speaker 1>Y melon U S. Bank is custody and that means

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

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<v Speaker 1>There are literal keys involved, but the metaphorical keys to

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<v Speaker 1>your cryptocurrency. Will hold on to that for you, will

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<v Speaker 1>keep it safe for a bank. That's what banks do.

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<v Speaker 1>People have been handing us valuable stuff forever, and now

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<v Speaker 1>we're just gonna do that with these virtual tokens. As

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<v Speaker 1>you put it, like very very traditional banking type responsibilities.

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<v Speaker 1>Why did it all go wrong? That's I think the

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

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<v Speaker 1>But uh, to be more specific, the the issue here

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<v Speaker 1>for for these banks, and specifically the ones that are

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<v Speaker 1>dealing with i'd say turmoil trouble are the folks who

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<v Speaker 1>really double down on crypto. We're talking Provident Bank, We're

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<v Speaker 1>talking most specifically silver Gate, Um other folks who have

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<v Speaker 1>seen shares definitely weaker, not to the same degree, but

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<v Speaker 1>definitely weakness. They're like Signature Bank. The issue is that

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<v Speaker 1>there's been panic in the crypto markets because FTX revealed

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<v Speaker 1>that someone who are an organization that was thought to

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<v Speaker 1>be one of the most stable players in the space

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

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<v Speaker 1>and so you had a panic. You had, in silver

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<v Speaker 1>Gates case, a bank run which people were pulling deposits

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<v Speaker 1>out of the bank because they were worried. And there's

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<v Speaker 1>also just less um, you know, treading, less activity in

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<v Speaker 1>the world of crypto because folks are losing money. Right,

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<v Speaker 1>So that combined together means that if you are anyone

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<v Speaker 1>who has doubled down on crypto as your your bread

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<v Speaker 1>and butter, the main thing you're doing, you're gonna be

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<v Speaker 1>in find, you know, a tough spot. In January, silver

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<v Speaker 1>Gate announced reorganization and and keep in mind as well,

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<v Speaker 1>that not the only ones talking about layoffs and having

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<v Speaker 1>to cut spending. We're seeing this across various folks that

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<v Speaker 1>operate in the crypto space. It's just that specific to

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

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<v Speaker 1>bank charter, they have f d I C, insurance, UH

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<v Speaker 1>and other sort of access to funds that a traditional

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<v Speaker 1>crypto player that doesn't have a bank charter would would

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<v Speaker 1>not be able to to touch those banks because of

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<v Speaker 1>their charters. Because they have these you know, they have

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<v Speaker 1>access to federal pools of money that other crypto donative

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<v Speaker 1>organizations don't have access to. They're essentially able to like

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<v Speaker 1>bail themselves out using government or federal funds, and that

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<v Speaker 1>that's happening, even though those bailouts came because they were

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<v Speaker 1>speculating on an asset class that not every regulator is

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<v Speaker 1>super happy for them to be involved with in the

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<v Speaker 1>first place. What what's happening there? What is the sentiment

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

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<v Speaker 1>major criticism, one that's definitely been voiced by a lot

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<v Speaker 1>of folks, especially short sellers, looking at these stocks. The

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<v Speaker 1>the answer on what regulators are saying is kind of disappointing,

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<v Speaker 1>but it's it's sort of not much. Essentially. The the

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<v Speaker 1>word from the SEC, the FED, and the fd I

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<v Speaker 1>C which put out a joint letter in January, is

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<v Speaker 1>be very cautious. You know, they're they're really worried about

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<v Speaker 1>the potential systemic risks presented by these digital tokens if

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<v Speaker 1>the contagion from crypto were to spread into the traditional

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<v Speaker 1>banking system. Folks would rather see this happen at these

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<v Speaker 1>smaller regional players that are not you know, important to

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<v Speaker 1>the kind of fabric of the financial system, the global

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<v Speaker 1>financial system. But that's kind of cold comfort to folks

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<v Speaker 1>who are worried about taxpayer dollars going to cover what

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

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<v Speaker 1>hear more from x Rays on what we can expect

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<v Speaker 1>in three as it relates to these crypto exposed banks.

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<v Speaker 1>This is a fact that I didn't know, but Provident

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<v Speaker 1>Bank one of the ones that you mentioned, it's first

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<v Speaker 1>chairman fourth under George Washington in the Revolutionary War. This

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<v Speaker 1>is like, this is a bank that has had generations

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<v Speaker 1>of relationships and they've kind of crushed on their crypto exposure.

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<v Speaker 1>So it's not that these banks are new. They have

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<v Speaker 1>had successful businesses in some cases for you know, hundreds

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<v Speaker 1>of years. Why did they get into crypto in the

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<v Speaker 1>first place, Like what was the attraction to them? The

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<v Speaker 1>big thing that you have to keep in mind when

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<v Speaker 1>it comes to regional banks, and that's you know, these

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<v Speaker 1>banks that are smaller that are focused on specific states

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<v Speaker 1>or specific chunks of the country, is that they've had

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<v Speaker 1>a lot of competition for a long time until recently,

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<v Speaker 1>especially during the pandemic, they were dealing with this very

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<v Speaker 1>low rate environment. They were dealing with this inability to

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<v Speaker 1>keep up with spending on technology and resources, encroachment by

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<v Speaker 1>the largest US banks. So they had to specialize. And

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<v Speaker 1>that's something a lot of analysts have talked about, something

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<v Speaker 1>that regulators are aware of. And sometimes that specialization comes

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<v Speaker 1>in the form of focusing on real estate. In a

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<v Speaker 1>case of Silicon Valley Bank, you know, they really doubled

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<v Speaker 1>down on their interests in funding and working with startups

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<v Speaker 1>and venture capital funds and that sort of thing. And

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<v Speaker 1>in the case of these banks were talking about right now,

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<v Speaker 1>they kind of hitch their wagon to cryptocurrency because it

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<v Speaker 1>was an area that other folks, other banks were not

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<v Speaker 1>dealing with. It was an area where they thought if

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<v Speaker 1>they took the right risk attitude, the right stance, they

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<v Speaker 1>could do it in a way that would be profitable

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<v Speaker 1>without introducing too much risk. But what we've seen in

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<v Speaker 1>several cases, right is that I guess you could say

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<v Speaker 1>the foundations of the industry were not there to support

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<v Speaker 1>this sort of let's call it an eggs in one

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<v Speaker 1>basket strategy. It has not been as sustainable or sustainable

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<v Speaker 1>to the extent that would want the business model of

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<v Speaker 1>a financial institution to be. For some of these organizations

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<v Speaker 1>when they and I'll use silver Gates as an example,

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<v Speaker 1>came out and said, Hey, we're going to issue our

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<v Speaker 1>own stable coin, or we're going to become, you know,

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<v Speaker 1>the leading experts on how you custody crypto assets for customers,

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<v Speaker 1>which was kind of one of the press releases put

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<v Speaker 1>out by US Bank, which is one of the largest

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<v Speaker 1>regional banks in the in the United States. What does

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<v Speaker 1>three hold for the prospects of these kinds of banks,

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<v Speaker 1>especially as it relates to crypto. Yeah, if I if

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

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<v Speaker 1>I think we're going to see a lot more just

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<v Speaker 1>of this pain, this blood letting. I'm not going to

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

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<v Speaker 1>and I don't think I'm allowed to make any outsized

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<v Speaker 1>projections as a reporter here at Bloomberg. But fundamentally, what

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<v Speaker 1>people are going to be looking for is whether or

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<v Speaker 1>not these banks can I guess whether the storm let's

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

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

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<v Speaker 1>you know, when the last time this came around, to

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

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<v Speaker 1>kind of thing where not only is the bank larger

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<v Speaker 1>in scale and kind of prominence, but also there are

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<v Speaker 1>just more eyes on it. In the last Crypto Winter

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<v Speaker 1>also did not feature the collapse of this player seen

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<v Speaker 1>as the adult in the room right in the in

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<v Speaker 1>the form of fd X. So I think it's hard

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<v Speaker 1>to draw comparisons or through lines. Uh. You know, I

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<v Speaker 1>hate using the word I'm precedented, and I'm pretty sure

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<v Speaker 1>if I use it again and a sentence, I get

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<v Speaker 1>like a golden watch or a free McDonald sand which.

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

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

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<v Speaker 1>to guess, And you know, I'm kind of remiss to

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<v Speaker 1>throw a speculation out there. But I think the big

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<v Speaker 1>thing we're gonna see more hardship, And the other question

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<v Speaker 1>is our regulators is going to take more decisive action.

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<v Speaker 1>Are going to see more regulatory action. We've obviously already

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<v Speaker 1>seen regulators looking to f t X, We've yet to

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<v Speaker 1>see specific investigations of these financial institutions when it comes

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<v Speaker 1>to their dealings with crypto. But there are questions about it.

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<v Speaker 1>Lawmakers have raised questions and letters. Senator Warren among others,

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<v Speaker 1>have issued letters asking questions. Yeah. But and and that's

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<v Speaker 1>the thing is that for the most part, what we're

0:12:43.840 --> 0:12:47.640
<v Speaker 1>talking about amounts to two questions raised by folks kind

0:12:47.640 --> 0:12:51.440
<v Speaker 1>of outside the rooms, but not necessarily the regulators the

0:12:51.440 --> 0:12:55.040
<v Speaker 1>banks themselves. And I think that's what we're all waiting on,

0:12:55.400 --> 0:12:56.960
<v Speaker 1>you know, is whether or not another shoe is going

0:12:57.000 --> 0:12:59.640
<v Speaker 1>to drop in that on top of these kind of

0:12:59.679 --> 0:13:05.000
<v Speaker 1>really difficult market and fundamental challenges, whether or not regulators

0:13:05.000 --> 0:13:07.840
<v Speaker 1>will step up and say something. And I think that's

0:13:07.880 --> 0:13:10.160
<v Speaker 1>one of the big questions that I'm going to be

0:13:10.960 --> 0:13:15.000
<v Speaker 1>you know, pondering and hopefully writing stories about. Yes, yes, yes,

0:13:15.000 --> 0:13:17.640
<v Speaker 1>I don't just stand in a room and think I've

0:13:17.640 --> 0:13:22.040
<v Speaker 1>been telding thoughts but not file any stories. Yeah. I wish,

0:13:22.200 --> 0:13:24.560
<v Speaker 1>I wish our jobs would be so much easier if

0:13:24.600 --> 0:13:28.440
<v Speaker 1>we only have to think and not then write things down. Um, Max,

0:13:28.480 --> 0:13:30.520
<v Speaker 1>thank you so much for being on the show. Yeah,

0:13:30.559 --> 0:13:33.520
<v Speaker 1>thank you for having me. That was Bloomberg Reports to

0:13:33.520 --> 0:13:35.840
<v Speaker 1>the Max. Rez You can find more of his reporting

0:13:35.840 --> 0:13:38.600
<v Speaker 1>in the Bloomberg Terminal and on Bloomberg dot com, and

0:13:38.640 --> 0:13:40.880
<v Speaker 1>be sure to check out art twice weekly Newslesso, which

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