The collapse of Silvergate, SVB holds some lessons for Indian crypto industry
It was one sinister wave after the other that rocked the boat in recent weeks — the back-to-back liquidation of two of the most crypto-friendly banks in the US, Silvergate and Silicon Valley Bank (SVB).
The collapse of these banks caused widespread concern in financial markets as industry experts still assess the impact on the crypto ecosystem.
That said, the banks failed because of their risk-hedging practices rather than their association with crypto.
The support from the US Fed has meant that the markets expect them to pivot sooner (i.e., stop increasing interest rates).
Bitcoin (BTC) has rallied well this week because of this expectation.
We believe there are two important aspects that need to be examined in this context — provision of good banking services to crypto entities and the importance of decentralised finance (DeFi).
Banking is a right for compliant platforms
SVB was one of the primary lenders for unicorns, startups, and tech companies.
Reliable reports suggested that it held $5 billion-worth of assets of prominent crypto firms.
Crypto and tech companies had an association of convenience with banks like SVB as they offered customized solutions and were more receptive.
The bigger US banks often were sceptical of crypto firms, and banking support stayed minimal or difficult to come by.
This aspect should have the Indian banking ecosystem also thinking.
The RBI, through a circular in 2018, had severed banking support to crypto firms.
The rule was overturned by the Supreme Court in 2020 but banking support remained sparse.
No major banks wanted to be seen associated with crypto. Even UPI-based support is not possible for the industry.
This is where the more-daring smaller banks have helped the crypto ecosystem.
It is only now that the crypto sector is getting some legal mandate in India.
From an unregulated space, crypto in India is increasingly getting clarity in areas from taxation to advertising.
The Centre had recently brought virtual digital assets (VDAs), more commonly, crypto assets and NFTs; its trading; safekeeping; and related financial services under the ambit of the Prevention of Money Laundering Act (PMLA).
There is no longer any justification to leave the crypto sector to the whims of the financial system.
Exchanges and related platforms should be granted access to the best banking support if they are compliant and have effective risk management procedures.
It is unfair that National Payments Corporation of India (NPCI) has restricted access for UPIs to crypto entities.
Customers who would like to make UPI payments have rather started using P2P in international exchanges, which is detrimental to the concept of regulation.In this context, the retail CBDC pilot by RBI is noteworthy.
If expanded, this could become the default onramp for crypto and Web 3.0 transactions – i.e, investors can transact with crypto and NFTs only via retail CBDC.
This can also be extended to sectors such as online gaming.
The adoption and success of the retail CBDC are dependent on its use cases and the regulatory clarity that accompanies its usage.
DeFi as an alternative
The collapse of Silvergate and SVB also throws light on the fragility of centralized financial systems.
While Indian banks are better regulated and structurally robust, this is a time for a prudent look at the capabilities of decentralized finance (DeFi).
DeFi uses smart contracts on a blockchain to execute financial transactions and avoids intermediaries.
DeFi has proved to be more agile and has survived despite the market volatility, while centralised finance (CeFi), at least in the US, has required bailouts.
DeFi systems are hugely dependent on technology and allow transparent and secure transactions that could revolutionize the banking and finance space if embraced well.
India has a large population of unbanked and underbanked individuals who could benefit greatly from DeFi.
DeFi platforms could provide financial services to these individuals at a lower cost with greater transparency and efficiency.
Moreover, it could help reduce the risk of financial collapse, as the system is not reliant on a few centralized entities. Another important lesson from the recent collapse of banks is the need for greater regulation and oversight.
While DeFi is a decentralized system, it still requires regulation to ensure that it operates fairly and transparently.
The need of the hour is that governments across the world regulate this industry, create standards, and remove the obstacles that are put in place to restrict innovation.
The government should enable the shift to a regulated environment firmly in its visibility and control.
As this plays out, the crypto industry will have to remain compliant and act responsibly to build trust with the government and the public.
By:ET
