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Banks around the world have reduced their cryptocurrency assets in custody to EUR1.0B (US$1.06B) in 2022 from EUR3.0B in 2021, according to a recent study by the Bank for International Settlements.
The approximately 66% drop in cryptocurrencies from banks Custody over the past year coincided with a market downturn stemming from a series of high-profile failures, ranging from the collapse of the Terra blockchain (LUNCH-USD) (USD-UST) in May to crypto exchange FTX’s (USD-FTT) implosion in November. bitcoin (USD-BTC), the largest token by market cap, plunged about 65% over the year, marking the worst year-over-year drop since it fell ~75% in 2018.
In addition, the Basel Committee on Banking Supervision, the main global standard setter for banking rules, approved new regulations late last year that a bank’s exposure to a certain cryptocurrency must be limited to 2%. The BIS cited this move as another reason for the drop in depository institution crypto custody, though the proposed rules will not go into effect until early 2025.
When taking into account participating banks in addition to those that did not report crypto custody exposures (but joined the broader Basel III monitoring exercise), the total exposure was 0.001% versus 0.005% for only those that did report. Banks clearly have marginal exposure to cryptocurrencies, which makes sense as many regulators have raised concerns about financial stability risks surrounding crypto banking.
Still, banks’ total prudential crypto exposures, including synthetic or derivative exposures, rose 30% year-on-year to €2.9bn, given “increasing underlying crypto asset activity,” according to the study. The underlying assets of the reported crypto exposures were primarily bitcoin (BTC-USD), 43%, Coinbase (NASDAQ: CURRENCY) stocks, 29%, and ethereum (ETH-USD), 4%.
Silvergate Capital (New York Stock Exchange: YES) has grabbed the spotlight in recent days as the crypto bank faces an exodus of institutional clients, including Coinbase Global (COIN) and Galaxy Digital (OTCPK:BRPHF), after signaling it will delay filing its annual report and raising doubts about its viability. . . The latest blow to the industry was reflected in the price of bitcoin (BTC-USD), sliding 4.7% to $22.36K as of Friday afternoon.
Amid protracted market turbulence, Signature Bank (NASDAQ:SBNY) has been working to limit its exposure to digital currency deposits to less than 20% of total deposits. In its recently issued mid-Q1 financial update, the lender said its spot deposit balances fell by around $826 million due to notable crypto deposit outflows of $1.51 billion.
Other banks that have dabbled in the decentralized finance (DeFi) space include: Goldman Sachs (New York Stock Exchange:GS), SVB Financial (NASDAQ:SIVB), Bancorp Clients (NYSE:CUBI), Metropolitan Bank (New York Stock Exchange: MCB), Bank of New York Mellon (New York Stock Exchange:BK), BNP Paribas (OTCQX:BNPQF) (OTCQX:BNPQY) and Leumi (OTCPK:BLMIF).
Earlier (March 3) two of the biggest cryptocurrency advocates in Congress rejected the SEC’s cryptocurrency accounting policy.