TheChek News Flow

Last year’s collapse of major crypto-friendly banks threw a wrench in the works of crypto markets, making it harder for hedge funds and other crypto investors to transfer money as fast as most of their trades require. Increasingly, though, crypto brokerages such as FalconX and crypto trading firms including GSR and B2C2 are stepping in to provide short-term financing to ensure their clients’ trades can settle immediately, generating big payoffs in the process.

The opportunity arises from a quirk of the crypto markets. Investors can trade 24 hours a day, all year round, and transactions happen instantly. But it can take several days to move cash used to buy and sell crypto to a crypto trading account. Crypto-friendly banks such as Silvergate Bank and Signature Bank had arrangements to ensure cash was immediately available. After they shut down, several crypto brokers—acting like shadow banks by extending credits—are making short-term loans that bridge the timing mismatch, charging annualized interest rates of up to 25%.

This shift shows how the bank collapses have reshaped the structure of crypto markets. Some firms that survived the crash in crypto prices have now emerged with a bigger role. It also highlights how the crypto industry still relies heavily on the movement of traditional cash behind the scenes, leaving an opening for intermediaries to make money.

“It was not a big thing until Silvergate and Signature Bank went away,” said Austin Campbell, a former executive in banking and stablecoin sectors who is now an adjunct assistant professor at Columbia Business School. “This is a regulatory bottleneck that’s been created, and you have shadow bank participants stepping up to fulfill the demand.”

Before they shuttered, Silvergate Bank and Signature Bank opened accounts for many crypto exchanges, trading firms, stablecoin issuers and funds. Since most of the crypto industry used the same banks, crypto companies could easily move cash to each other seven days a week in real time.

Some banks, such as Cross River Bank, are still processing transactions for crypto clients. Another such bank, Customers Bank, is operating under a Federal Reserve enforcement action barring the Pennsylvania-based bank from taking on new crypto clients without regulatory signoff. Meanwhile, brokers have jumped into the sector to provide a workaround.

One such firm is FalconX, a crypto prime brokerage backed by investors including Tiger Global Management and Singapore’s GIC. It allows clients to place bets on bitcoin before their money arrives at the brokerage’s bank account, using a credit line secured by the clients’ other investments, also handled through FalconX.

While FalconX has offered the service for years, the demise of crypto-friendly banks has been a “catalyst for growth in our business,” because clients are looking for alternative ways to finance and settle their trades, especially outside banking hours, said Austin Reid, the firm’s global head of revenue and business.

For example, if a hedge fund wants to buy bitcoin on a Saturday using money in its bank account, it can use its credit line with FalconX to lock in the price. The client will pay FalconX cash for the bitcoin, plus interest for each day it takes the cash to reach FalconX’s bank account, and then FalconX releases the bitcoin to the client once it’s paid.

“The dollar they will send us includes both the costs of the bitcoin itself, plus the interest rate to keep that position open over that time period,” said Reid. A FalconX representative said the amount of credit it extends to clients has tripled so far this year over last year.

B2C2 also finances clients’ crypto trades done outside banking hours. “Some crypto participants aren’t able to get a bank account at either Cross River Bank or Customers Bank, so they will have to rely on us to fund their trading over the weekend,” said Thomas Restout, CEO of B2C2.

The interest rates FalconX, B2C2 and others charge fluctuate daily based on borrower demand and crypto market volatility. They typically range between 9% and 15% on an annualized basis, though they can rise as high as 25% when bitcoin prices soar, because borrowers expect to cover the interest costs through their trading strategies.

These loans are short-term in nature—a hedge fund’s cash typically arrives in a trading firm’s account a few days after the trade. That limits the risk, compared with the types of crypto lending that caused the failures of BlockFi, Celsius Network and Voyager Digital in 2022. In those cases, crypto lending platforms funneled consumers’ money to crypto hedge funds like Three Arrows Capital and Sam Bankman-Fried’s Alameda Research, which were making speculative bets in a myriad of tokens and crypto projects.

“You are lending to large, more creditworthy institutions, who have a need for cash because of settlement timing issues,” said Campbell.

Short-Term Financing

Crypto trading firms are also fronting money to investors jumping into digital tokens— tied to traditional assets such as stocks and bonds— that trade on blockchains.

One example is tokenized money market funds, blockchain-traded tokens that represent shares in an underlying traditional money market fund. Asset management giant BlackRock, for example, has partnered with startup Securitize on a tokenized version of a money market fund that has gathered more than $500 million in assets since it launched in March.

These tokenized funds are similar to stablecoins, except they pay a yield that comes from their underlying portfolio of Treasurys and other short-term debt. That’s made them attractive for investors including crypto protocols and foundations that support blockchain projects.

But cashing in and out of the tokenized fund still comes with delays. If an investor wants to sell a tokenized money market fund holdings on a Friday night, it could be four days before they see the cash in their bank account, because banks are closed over the weekend and money market funds take another two business days to settle.

Market-making firms including GSR and B2C2, whose main business is buying and selling crypto to provide market liquidity, have seized on a new short-term financing business that speeds up the process.

“This is the point where the crypto markets and traditional markets are trying to clash. Weekends are closed here [in traditional banking], and weekends are not closed there [in crypto markets],” Ruchir Gupta, head of treasury and options trading at GSR, said. “The moment you bring them together, you have all these frictions in the market.”