It has been a tumultuous few days, as the United States banking system has begun to falter. The issue stems from the short-sighted decision by the Federal Reserve to increase interest rates 19-fold within a years time, after banks stocked their shelves with long-term Treasuries during the low interest environment leading up to 2022, that was promised to remain. While the moves to raise rates were view by many to be a necessary to reign in inflation, the speed at which they occurred did not account for depositor demands and bank liabilities in a harsh environment.
Mass layoffs have ensued across a variety of sectors over the past year, with the Tech industry arguably being hit the hardest. With VC funding having dried up, clients/depositors of various banks began to withdraw their funds to continue operations. Unfortunately for the banks that loaded up on low-interest treasuries, this meant being required to now offload assets at a loss in order to fulfill their client obligations. The result? Banks like Silvergate, Silicon Valley Bank, Signature, and potentially more, have suffered from such a liquidity crisis that they were shut down.
With those three banks in particular playing a large role in providing services to the digital asset sector, many are wondering where companies will now turn to have their needs met. Yes, there are still plenty of options on the table, with various already indicating an intent to move towards industry giants like BNY Mellon, others have different plans, including operating as Neobanks.
What is a Neobank?
A Neobank, or sometimes referred to as a ‘challenger bank', is a company which offers basic banking services which are tailored towards a specific group of clientele.
These companies typically do not maintain brick-and-mortar locations, operating online only. They differ from actual online-banks, as they do not boast a bank charter. This means that while they may be able to offer an underserved industry or group of clientele access to certain banking services, there are certain protections that typically are not afforded unless affiliated with a chartered bank (ie. FDIC coverage).
Although services on offer by Neobanks are typically limited, as they do not offer things like in-person customer service, physical branches, and certain protections, there are various benefits in using them. These include accessibility within underserved markets, convenience, better operational efficiency resulting in lower fees and higher rates, etc.
Who is On-Board?
In response to the ongoing banking crisis, there have been various questions posited across social media platforms surrounding Neobanks. One in particular garnered a response from Coinbase CEO, Brian Armstrong.
Of course, this is just chatter at this time. It does show however that the idea of operating as a Neobank is one that is floating around some of the top companies within the digital asset sector that is actively repositioning itself.
As it stands, a variety of existing neobanks already, or plan to offer, some level of service for digital assets. These include companies like Step, Current, MoneyLion, and many more.
Are Neobanks Needed?
There are those that wonder if Neobanks are needed at at all. The following are a few brief reasons why they might not be moving forward.
Crypto-Focused Chartered Banks
Although not live yet, there are examples on the horizon of actual chartered-banks being formed specifically to serve the digital asset sector. Perhaps none are more anticipated than that of Kraken Bank.
The popular exchange states that it plans on launching, “…digital-first traditional and crypto banking products, with cryptocurrencies represented as a first-class citizen. We're looking into products like deposit accounts in USD and crypto assets (ex. Bitcoin), multiple funding and payments options, institutional custody products (qualified custody for advisors and broker dealers), IRAs and many more.”
Unlike traditional banks, Kraken does not believe in the fractional-reserve system. To that end, it states “Kraken Bank will be fully reserved (i.e., no fractional reserve banking or associated re-hypothecation and lending activities). All assets will be kept on hand and available as cash or the least risky, most liquid cash equivalents. We will also maintain significant capital reserves and surpluses of our own capital to cover the full balance of all clients, even in the event of a “bank run.”
While only time will tell, Kraken has been touting its pending bank launch as a solution to the current issues causing turmoil in the banking system since it first received its SPID approval in 2020.
A Global Presence
While the United States is arguably the most influential country in the world, it is just one country at the end of the day. With digital assets operating on a global scale, the digital asset sector does not need for companies to remain within the U.S., and there is no need for industry participants to rely solely on U.S. based services.
This perspective is one being increasingly shared, as many now believe that the United States may miss out on becoming a leader in the worlds future economy if it continues heading down the path it has recently embarked upon.
Be Your Own Bank
Remember that Bitcoin itself arose in a timely fashion after the last U.S. banking crisis in 2008/2009. The entire premise was that use of its network allowed participants to be their own bank. It provided a medium to transact value in a transparent manner, while removing the need to trust. In 2023, this has not changed.
Centralized entities can succumb to bank runs, fraud, and mismanagement. Bitcoin itself can not. Yes, its value may flucuate, but this is based on supply/demand – not poor risk management and fractional-reserve lending. When your BTC is in your non-custodial wallet, you are in control. That means that while there is increased responsibility on you, no one else has the ability to rehypothecate your funds or expose you to undue risk.
With the collapse of various banks rocking the financial world, this is a selling point that has now begun holding greater weight among many.