SVB’s collapse upends UK banks' warnings on crypto risks

For years, financial regulators and international standard setters have warned banks about the dangers of getting too close to the cryptoasset business.

In turn, banks have warned their customers not to exchange their current account cash for crypto tokens, and in some cases, even banning them from doing so.

The collapse of one of the most well-known banks for crypto businesses has inverted that perceived notion of risk. Now, crypto players are being warned they need to protect themselves from the banking sector.

On March 9, shares in the Nasdaq-listed Silicon Valley Bank crashed and US depositors claimed they were unable to make withdrawals. The next day, the Bank of England said it would put the bank's UK arm into an insolvency procedure, although by yesterday morning, HSBC announced it had bought SVB UK for a nominal sum.

While the news was a huge relief for the crypto and tech sector in the UK, it has also highlighted a particular bone of contention: access to banking relationships.

Banks have traditionally been unwilling to take on clients from the crypto sector. Monica Kalia, an adviser to startups and founder of fintech company Neyber, says it’s “really hard” for a startup to open a bank account in the UK.

“The on-boarding involving 'know your customer' and 'anti-money laundering' requirements for new clients does need to be rigorous but can often be a minefield for startups with no track record,” Kalia, also a non-executive director at the Money and Pensions Service, told MLex.

“On top of this, there is risk aversion on the part of the banks post the last financial crisis with higher capital requirements under Basel II required to lend to these businesses. Banks are forced to take a short-term view and often view these relationships as unprofitable.”

Going further, some banks have even banned their clients from using their money to invest in crypto businesses.

HSBC, Nationwide, Santander, Natwest and Lloyds have all been reported to have banned or limited their customers' transactions with some crypto businesses. The Financial Conduct Authority has repeatedly warned about the prevalence of scams in the sector and said investors should be prepared to lose all of their money.

Crypto businesses have then been forced to use the services of the few banks willing to take them on, of which SVB was one of the most highly regarded.

“Silicon Valley Bank really understood their customers. If you applied for a loan, they would ask about revenue, runway, milestones and pitch deck, unlike a high street bank, which was only concerned with profitability,” Sabrina Castiglione, chief operating officer of fintech company Pento, said in a webinar* today. “They offered the best, the most accessible notice accounts with the highest interest rates.”

For many UK crypto businesses, and possibly most, it was the only bank they used. But for a bank to be so exposed to one sector raises concerns and makes it vulnerable to fluctuations and crashes.

SVB had been suffering over the past year as the tech sector lost favor after the pandemic-era boom and investors’ cash injections were harder to come by. That meant deposits had been slowly drying up.

Add to that rising interest rates, when SVB had significant assets tied up in fixed-rate securities, meant the bank was forced to sell a chunk of stock for a $1.8 billion loss. The news came just days after another US crypto bank Silvergate crashed. Spooked investors dumped shares in SVB while venture capitalists in the UK told their portfolio companies to get their cash out of the bank as fast as they could.

The Bank of England didn’t reassure SVB’s client base by its March 10 statement putting the bank into insolvency, which said that it “has a limited presence in the UK and no critical functions supporting the financial system,” and that deposits would be protected up to 85,000 pounds ($103,000) — a figure that represented less than 5 percent of average UK deposits.

The UK tech sector was outraged, and a group of prominent chief executives wrote to finance minister Jeremy Hunt warning that if the government didn’t act quickly, the existence of the entire industry was at risk.

Announcing the deal with HSBC yesterday morning, Hunt said regulators and the government had worked “urgently” through the weekend to avoid “an extremely dangerous” situation.

Beware banks?

While crypto businesses breathed a high sigh of relief when it became clear that they would still have access to the deposits to pay staff and suppliers, they are now being warned about protecting themselves from the banking sector.

“To date many banks have been ‘protecting’ themselves from crypto exposure, by limiting or banning crypto transactions and demonstrating limited appetite for providing banking relationships and services to our sector,” Su Carpenter, director of operations at industry association CryptoUK, said.

“Given the recent turn of events, crypto firms must now consider how to ‘protect’ themselves and their customers from banking exposures, and we will be looking at ways to support and educate our members on how they can de-risk their businesses in this regard,” Carpenter said.

That HSBC has readily taken on SVB’s clients indicates that for at least one bank, the prevailing view may be changing. Carpenter said she hopes to see more large banks willing to provide lending and custody services to her sector.

“This would help drive innovation, better protect consumers, and help crypto businesses de-risk by spreading funds across more providers.”

Kalia said banks need to work hand-in-hand with the government, regulators and organizations such as the Centre for Finance and Innovation and Technology, which aim to remove barriers to entry for the tech sector to take a more open-minded approach.

The tech sector is a powerful lobby for itself, and questions have been raised of whether the government would have been so motivated to forge a rescue deal for another failing bank with a more diverse client base.

In UK terms, the close call that was SVB’s collapse will now be leveraged by the same people who pressured the government to agree on a rescue deal to push policymakers and regulators to introduce protections for the sector that will avoid a similar near-miss in the future.

* SVB UK saga: What happens next? Sifted, Online, March 13, 2023.