A tale of three: Lessons learned from a modern banking odyssey

Perhaps, the most important is that it is imperative for banks to exercise prudence while engaging with entities or individuals involved in cryptocurrency-related transactions.

Yosea Iskandar

Yosea Iskandar

The Jakarta Post


Bracing: An employee holds open a door at Silicon Valley Bank’s downtown San Francisco branch in California on March 13, 2023. (Reuters/Kori Suzuki)

March 21, 2023

JAKARTA – The collapse of three United States banks, Silvergate Bank, Silicon Valley Bank and Signature Bank, sent ripples through both the banking and cryptocurrency industries this month. The three banks, which focus on technology start-ups and digital assets clients, experienced setbacks due to soaring interest rates, customer withdrawals and regulatory pressures.

Silvergate Bank had close ties to FTX, a bankrupt cryptocurrency exchange accused of fraud by the US Department of Justice. It announced on March 8 its intention to wind down operations and voluntarily liquidate after suffering losses related to the dramatic collapse of crypto-exchange FTX. Silvergate reported a one-billion-dollar loss as investors raced to withdraw their deposits.

Silicon Valley Bank or SVB was the 16th-largest bank in the US, which provided banking services to nearly half of all US venture-backed technology and life-science companies in the US. It also made significant investments in long-term US government bonds, which lost value when the Federal Reserve (Fed) raised interest rates. SVB failed on March 10 after a bank run by its tech customers, who withdrew their deposits. It was the second-largest bank failure in US history, and the most significant since the 2008 financial crisis.

Signature Bank, a regional bank based in New York, rose to prominence in cryptocurrency lending by accepting crypto deposits and establishing a 24-hour payments network for crypto clients. On March 12, Signature collapsed after customers, spooked by the SVB failure, withdrew more than US$10 billion in deposits. It was the third-largest bank failure in US history.

The repercussions stemming from these bank failures were notable. Regulatory bodies and investors scrutinized risk-management methodologies and the extent to which financial institutions were exposed to volatile assets like cryptocurrencies. The irony associated with these failures is hard to ignore.

Technology advancement and cryptocurrencies were previously viewed as a potential remedy for the public’s distrust in traditional banking institutions following the 2008 Lehman Brothers bankruptcy. It may now be perceived as a contributing factor to the problem in the modern banking industry.

Decentralized digital currencies, according to proponents, could provide a more transparent, secure and efficient alternative to traditional fiat currencies. However, as recent events demonstrate, cryptocurrency is not immune to fraud, manipulation or market fluctuations.

Crypto relies on intermediaries such as exchanges and custodians, which can be manipulated, or shut down by regulators. The failure of these banks serves as a reminder that digital currencies have a long way to go before they can substitute traditional currencies. It also demonstrates the harm that crypto assets can cause to the banking and financial industries.

The regulatory framework for crypto assets in Indonesia is still evolving. Bank Indonesia (BI) prohibited the use of virtual currencies as a form of payment within Indonesia in the BI Regulation No.23/6/2021 regulation on Payment System Service Providers. Under this regulation payment service providers are prohibited from facilitating virtual-currency trading. This means Indonesian banks cannot accept cryptocurrency deposits or offer cryptocurrency-related services.

Meanwhile, the Financial Services Authority (OJK) previously prohibited financial service institutions such as banks, insurance companies and multi-finance companies from facilitating crypto activities ranging from marketing to crypto-asset trading, because of its concern for consumer protection considering the relatively low general public financial literacy.

Regardless, crypto-related transactions are not entirely illegal in Indonesia. The rules governing crypto assets in Indonesia can be found in the Indonesian Commodity Futures Trading Regulatory Agency (Bappebti) Regulation No. 8 of 2021, as amended by Bappebti Regulation No.13/2022, regarding Guidelines for Conducting Physical Market Trading of Crypto Assets on Futures Exchanges.

Bappebti recognizes crypto assets as commodities rather than currencies. It defines crypto assets as intangible digital commodities that use cryptography, information technology (IT) networks and distributed ledgers to organize the creation of new units, verify transactions and secure transactions without the intervention of others.

Under Bappebti regulation the trading of crypto-asset physical market can only be done using electronic facilities owned by crypto-asset physical traders. The activities shall be facilitated and supervised by futures exchanges that have obtained approval from the head of Bappebti.

However, the new Law on the Development and Strengthening of the Financial Sector mandated the Financial Services Authority (OJK) with new roles as the crypto-asset regulator and supervisor. Despite the potential for transformative change in the regulation and possible new opportunities in crypto space, the decision for banks to enter the crypto-asset business is critical and carries significant implications.

There are lessons for banks to learn from the three US banks’ odysseys before embarking on the journey to the dynamic and rapidly evolving cryptocurrency landscape.

First, it is imperative for banks to exercise prudence while engaging with entities or individuals involved in cryptocurrency-related transactions. This entails conducting due diligence to establish the legitimacy of businesses, evaluating potential risks and ensuring adherence to regulatory standards and compliance.

Second, banks must have a solid risk management framework that can identify and manage potential risks associated with various types of assets, including crypto assets. This framework should be integrated into the bank’s overall business strategy and regularly updated to reflect changes in the technology and crypto-assets market.

Third, banks must prioritize customer education and communication to maintain customer trust and confidence. This includes providing educational materials and offering transparent disclosures on the risks and opportunities associated with banks’ products.

Fourth, banks must work closely with regulators and other stakeholders to ensure they are up-to-date with the latest developments in the technology and crypto-assets space. This includes participating in industry working groups, sharing information with regulators and collaborating with other banks and financial institutions to develop best practices and standards.

In conclusion, the recent collapse of three US banks highlights the risks and exposures linked to technology start-ups and cryptocurrency. While the Indonesian banking sector remains unaffected by the unfortunate event, there are crucial insights for all stakeholders to manage risks and seize opportunities in the digital economy.


The writer is head of legal and corporate secretariat at Bank DBS Indonesia. The views in this article are personal

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