With banks that had been a key funding source for the cryptocurrency industry going out of business, questions are being asked about where crypto goes from here. Family investors interviewed by AsianInvestor feel the industry is at a crossroads.
The crypto exchanges and their clients formed a significant chunk of Silicon Valley Bank (SVB) and Signature Bank’s deposit base, but any sense of camaraderie disappeared once their weaknesses became apparent.
It’s the opposite of the so-called prisoner's dilemma in game theory, said Singapore-based family office investor Edward Foo.
“The optimal outcome inherent in this state is ‘the self’: getting out ahead of the others and to the detriment of others. It is not based on an optimal outcome for all parties involved,” Foo told AsianInvestor.
“We are now in the age of instant messaging and a bank run is no longer what it was when people were lined up outside the bank,” said Hong Kong entrepreneur Timothy Tsui.
“The craziest thing is the speed of what just happened. Once people get a group message saying this bank may go under, the first thing they do is log on to their online bank and start transferring funds instantly. This has never happened before,” Tsui told AsianInvestor.
Influential industry players spoken to by AsianInvestor revealed they had received messages from friends working at SVB saying, “Please tell your friends to bank with us, we’re the best place to put your money now.” In theory, they’re right, because the government has stepped in to guarantee depositors, but it remains to be seen whether that money will return.
The ‘crypto winter’ over the last year, characterised by the collapse of FTX, was a sign that the knives were out for crypto. This latest crisis has just added to the pile-on.
Horace Ma, director of Hong Kong family office Mardell Investments, was not materially affected by the latest bank collapses, but he remains sceptical of crypto’s future in its current form.
“Those crypto geeks always desire a DeFi environment. But it is unrealistic when all governments in the world want you to be accountable for every dollar you earn and possess, in order to tax you. You would not be able to detach from the fiat monetary system as long as you are having a physical presence in this world. Therefore, all the crypto monies are fiat-related and ultimately everything in the crypto world has to be taken care of in the fiat world too."
Henry Chong, chief executive of the Fusang digital exchange, told AsianInvestor, “There’s always been a question of how crypto interfaces with the real world.”
“It has always operated in a slightly parallel system. This latest crisis will put that into focus even more. If crypto technology is going to be interesting, it needs to interact fully with our everyday lives. If it purports to be a payment system, can I use it for payments? If I can’t and in reality I always need to transfer back into, let’s say, US dollars and local currencies to make payments, then it’s not really fulfilling that job.”
Foo’s view is that while probably only a handful of individuals really have a full understanding of what transpired at SVB and Signature, "events like these don’t just happen”.
“This sort of behaviour is not isolated at all. Has anything really changed since 2008/2009? Similarities can be observed with the various scandals that happened just in the last 9 months within the crypto world.
“Critically, what does this mean for the private equity and venture capital world, especially for those investors with a heavy concentration in technology?” He expressed concern at the effect on pension funds if contagion results in substantial mark-downs.
“The markets and economies are more inter-connected than we care to admit.”
As BlackRock CEO Larry Fink noted in his annual letter to shareholders, issued last week, “Markets remain on edge. Will asset-liability mismatches be the second domino to fall?”
And possibly a third: “In addition to duration mismatches, we may now also see liquidity mismatches. Years of lower rates had the effect of driving some asset owners to increase their commitments to illiquid investments, trading lower liquidity for higher returns. There’s a risk now of a liquidity mismatch for these asset owners, especially those with leveraged portfolios.”
FUTURE OF CRYPTO
If the future doesn’t look at all bright for crypto, there is still scope for the industry to pivot towards a more meaningful integration, said Chong.
“In the last year, crypto has faced one crisis after another – two rounds of crypto winter, a lot of institutions blowing up, and now this entire banking situation that…has been tough for the B to C crypto industry. It’s a question now of saying how do we make it more efficient for the benefit of the financial industry.”
Fink believes the operational potential of some of the underlying technologies in the digital assets space could have exciting applications.
“In particular, the tokenisation of asset classes offers the prospect of driving efficiencies in capital markets, shortening value chains and improving cost and access for investors. We continue to explore the digital assets ecosystem, especially areas most relevant to our clients, such as permissioned blockchains and tokenisation of stocks and bonds.”