The potential rise of shadow banking for cryptocurrency firms


16th March 2023 – (New York) At a panel titled “Popping the Web3 Bubble” during the South by Southwest (SXSW) conference on March 14, software engineer Molly White suggested that the collapse of three major banks with ties to cryptocurrency firms could lead to companies seeking banking options to consider “shadier” solutions. White noted that the loss of Signature and Silvergate banks, which were known for their crypto-friendliness, could force crypto firms to go underground, similar to the challenges faced by the industry in 2017 and 2018 when traditional finance was difficult to access.

White highlighted the need for the crypto industry to have access to traditional finance and US banking rails. However, the absence of Signature and Silvergate banks may make it more challenging to achieve. As a result, the industry may have to explore alternative banks willing to work with them or resort to shadow banking. The New York Department of Financial Services’ closure of Signature Bank has been criticized by some insiders and outsiders who suggest that it was an overreach by authorities due to the bank’s connection with crypto companies.

The SXSW conference, which runs until March 19, has attracted numerous speakers from the crypto and blockchain sectors, including activist and cybersecurity expert Chelsea Manning. During her talk, Manning discussed how blockchain technology can address challenges associated with artificial intelligence.

The potential rise of shadow banking in the crypto industry is a matter of concern for regulators, given the lack of transparency and regulatory oversight associated with such entities. Shadow banking refers to financial intermediaries that conduct banking activities outside the traditional banking system, and they are subject to fewer regulations and oversight.

The use of shadow banking by cryptocurrency firms could lead to increased risks of money laundering, fraud, and other illicit activities. As a result, regulatory authorities may take a more cautious approach towards the crypto industry, leading to further challenges in accessing traditional finance.

Cryptocurrency firms may have to seek alternative banking solutions to avoid resorting to shadow banking. One potential option is to partner with banks that are willing to work with the crypto industry. However, given the regulatory uncertainty associated with the crypto sector, not all banks may be willing to do so.

Another alternative could be the use of decentralised finance (DeFi) protocols, which could enable crypto firms to access financial services without relying on traditional banks. However, DeFi is still in its early stages and may not be a viable option for all crypto firms.