Crypto is getting de-banked. What this means for Bitcoin and the industry.

“Crypto’s banking rails have been effectively shut down in less than a week,” said Ryan Selkis, CEO of crypto analytics firm Messari, on Twitter.

While proponents like to say that the industry will one day make banks irrelevant, right now, crypto firms badly need access to the traditional financial system. The failures have important implications for the token market, the crypto industry and stablecoins.

Counterintuitively, for tokens like Bitcoin, bad news is good news in the short term.

That’s because the Federal Reserve is now more likely to slow or even stop rate hikes, giving a boost to all risk assets, Sean Farrell, head of digital asset strategy for Fundstrat, said in a research note on Friday, following the failures of Silvergate and Silicon Valley Bank. Signature’s takeover only strengthens this argument, and the token market seems to agree: Between 5pm Eastern and midnight on Sunday, Bitcoin’s price rose about 8.5%.

But in the longer term, it is clear that the failing digital asset industry is going to struggle to reconnect with the banking system.

Some in the crypto industry view the trifecta of failures as the undoing of a regulatory effort. Since January, US banking regulators have continuously warned financial institutions about the risks of providing services to crypto.

While regulators — which include the Fed, the Federal Deposit Insurance Corp and the Office of the Controller of the Currency — say banks are not discouraged or prohibited from doing business with any industry, many crypto firms say the practical effect has been to make it almost impossible to find banks that are even willing to provide basic services.

Signature began distancing itself from crypto in December, pledging to diversify its deposit base away from the industry following the fallout from the failure of crypto exchange FTX. But it was still widely used among crypto companies.

Trading platform Coinbase Global (ticker: COIN) on Sunday said it has $240 million in corporate cash at Signature. Stablecoin issuer Paxos Trust Co. said it has $250 million.

“The closures of Silvergate, SVB
,

and Signature creates a huge gap in the market for crypto-friendly banking,” said Jake Chervinsky, Chief Policy Officer of the Blockchain Association trade group, on Twitter.

Although some banks continue to open accounts for crypto companies, some in the industry speculated that regulators will try to cut off banking access.

“Operation Chokepoint 2.0 may have overplayed their hand this time, but the threat remains. They will continue to attack the rails, products and companies that facilitate direct crypto ownership,” said the official Twitter account of the Kraken trading platform on Sunday. Kraken was referring to a 2013 Justice Department investigation into banks that did business with payday lenders and other industries.

The weekend also proved damaging for stablecoins such as USDC, issued by Circle Internet Financial. USDC and other such coins attempt to peg their value to the dollar by promising to allow investors to redeem their tokens for regular money in a bank account. They do this by holding reserves in relatively safe assets such as government bonds and bank deposits.

But that premise fell apart over the weekend after it emerged that 8% of Circle’s reserves were trapped in Silicon Valley Bank. Circle’s token was decoupled and fell to around 88 cents on the dollar on crypto exchanges on Saturday. Some exchanges like Coinbase, which partners with Circle on the coin and earns revenue from it, stopped USDC conversions, citing the need to wait for bank transfers during normal business hours.

The signature closure was another hit. Regulators announced the government would make depositors whole, driving the USDC’s value back to nearly a dollar as of Sunday evening. But Circle CEO Jeremy Allaire noticed that the company had been using Signature to mint and redeem USDC and was to approach other banks starting Monday.

Allaire said the company would lean on Bank of New York Mellon

(BK). Later on Sunday, the company also announced a partnership with New Jersey-based Cross River Bank to handle token redemption and redemptions.

“We have long advocated full-reserve digital currency banking that insulates our base layer of internet money and payment systems from fractional reserve banking risk,” Allaire said in a statement.

It’s hard to build a business when you’re being chased from bank to bank.

Write to Joe Light at joe.light@barrons.com