Banking The Crypto Industry

Full disclosure: this isn’t yet another blog post about the banking sorry saga which started in the US with the closure of Silvergate, Silicon Valley Bank (SVB), Signature and a few more regional banks; and it isn’t a story about how the UK Government quickly stepped in to ensure HSBC rescued SVB’s UK business and the UK fintech sector for a modest £1.

Undeniably, it was a stressful few days for all companies and depositors who had their money temporarily frozen. Nonetheless, it would be simplistic to say that this is yet another problem of the crypto industry, or indeed of its own making. How many more times do we need to read about governance & risk management controls which were not fit for purpose and the hubris of a few well paid bank executives?

Germany’s Chancellor Olaf Scholz has been reassuring markets that SVB’s collapse did not spread to the market since strict controls were put in place since the 2008 financial crisis. Should we feel reassured? Mr. Scholz was the Finance Minister in charge when Wirecard Bank collapsed in June 2020. This was the largest corporate failure in post-WWII Germany. Reason for the collapse? Lack of governance and risk management, fraud, creative accounting and so much more which has been uncovered by The Financial Times. It is true that since 2020, Germany’s regulatory authorities have been much more proactive in auditing and investigating the country’s financial institutions notably N26, Solaris, Unzer and C24 Bank which all faced restrictions until they improved their controls.

During the same period, the UK’s Greensill Capital and its German subsidiary Greensill Bank collapsed spectacularly with no little help from Credit Suisse. The Swiss bank is now also in trouble with increased regulatory scrutiny and its stock down ca. 40% in the month to March 15th, in part also due to the “SVB ripple effect” and a lack of confidence in traditional banks. On March 16th, Credit Suisse’s stock rose after the Swiss National Bank announced what was akin to a $54 billion bailout.

At the core of it all are decisions which were made by banking executives to take on excessive risks whilst weakening the governance and risk controls of the banks they were running.

Who are supposed to be the guardians of the system? On the one hand some regulators have either been asleep at the wheel or pandering to their financial institutions lobbying for too long. On the other hand, the audit profession also comes away from this with a  bruised eye. Poor auditing practices or blatant conflicts of interest are part of the rot that set in.

It will be interesting to see how KPMG, the auditor of SVB and Signature, will fare once the investigations into the clean bill of health they had issued to the banks just days before their collapse was concluded. Will we have another case like that of audit firm EY, which failed to spot that €1.9 billion was missing Wirecard’s bank accounts?

Silvergate and Signature had a rather large exposure to the crypto and web3 sectors, but what was interesting in the demise of SVB was just the sheer number and variety of fintech businesses they were catering to in the US and the UK. The loss of these banks is not an indicator that there was something wrong with their clients, but rather that they became too large too quickly and did not know how to safely manage the deposits. Now thousands of genuine fintech businesses including web3 companies are looking for new safe homes where they can be sure their funds will be safely looked after.

If you are a business operating in the web3 or crypto space, reach out to us to learn how Merge manages risk to safeguard your funds.