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Scrambling Crypto Firms & Dwindling Lenders

After a string of high-profile failures, including the bankruptcy of major exchange FTX in November of last year and a lack of regulation, traditional banks are sceptical of crypto customers.

Photo by Tim Mossholder / Unsplash / Blockhead

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There is a danger that the crypto industry will become overly dependent on a limited number of financial institutions due to the recent failure of three crypto-friendly lenders in the United States.

US regulators are worried about this possibility because the failures of Silvergate Capital Corp, Signature Bank, and Silicon Valley Bank cast doubt on the viability of banking models heavily weighted towards crypto customers.

Banks in the United States have been warned by authorities to be on the lookout for liquidity concerns associated with cryptocurrency deposits, which might see fast withdrawals if consumers try to convert their cryptocurrency holdings into fiat currency.

According to a bank representative, FV Bank, a US-licensed, fintech-focused bank in Puerto Rico, has recently witnessed an increase in client enquiries.

The Federal Deposit Insurance Corporation (FDIC) does not cover FV Bank. However, a representative for the bank explained that because it does not make loans, it does not face the same dangers as conventional banks that use a fractional reserve structure.

Crypto companies need banks' services to store their clients' USD deposits and conduct other routine banking transactions.

Crypto Firms Bet Big on Franklin Templeton's Fund

In the wake of the closure of numerous crypto industry-friendly banks, Franklin Templeton reports inflows from crypto-related firms into its money-market fund that registers share ownership on a blockchain.

Franklin OnChain US Government Money Fund (FOBXX) holdings are now over US$270 million after debuting in 2021 and going public the same year.

Stellar, a blockchain network, is used to execute transactions and keep track of ownership records for the fund. There are no crypto assets held by the fund, which instead invests in US government securities, cash, and buyback agreements.

The Stellar Development Foundation, a charity that promotes the Stellar blockchain, is one of the crypto projects that has contributed to the fund. The foundation has lately put up US$20 million.

Stellar Development Foundation CEO Denelle Dixon noted that the nonprofit still has bank accounts at failing institutions, including Silicon Valley Bank.

"Our money was just sitting in the bank accounts, and that was not the best place for the value to sit," she said.

According to Roger Bayston, head of digital assets at Franklin Templeton, asset management has had an "elevated" level of talks with a wide range of crypto-related parties, such as decentralised autonomous organisations, foundations, and initiatives.

Shares in the fund are represented by digital tokens called BENJI. The fund's share price has been set at US$1 throughout. Executives at the asset management firm have stated that making the tokens transferable between investors in the fund is on the company's plan.

"Money market funds are used for collateral purposes and payment purposes off-chain," explained Sandy Kaul, senior vice president at Franklin Templeton.

However, she said the firm "will fully anticipate that those types of use cases will move on-chain" as the rules become clearer.

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