When banks go bust, protections usually kick in to prevent investors' capital from becoming part of the bankruptcy estate. Swift action by regulators and purposeful communication with customers can prevent a bank run in many cases and allow operations to proceed in an orderly fashion.
While there has been some change for the better in bank capital levels since the financial crisis, a new factor that cannot yet be assessed has been added in recent years. Cryptocurrencies enjoy ever greater acceptance. Banks or brokers integrate the coins and tokens into their strategies. However, the convergence of the two "worlds" ensures that bank failures also affect the crypto markets.
Banks bankruptcies also affect the crypto markets/ Image source: Andrii Yalanskyi/ shutterstock.com
- Bank failures are subject to regulatory requirements
- Customer deposits are usually protected
- Unpredictability arises from banking transactions with crypto markets
- Insolvencies on one side affect the other
Trade cryptos here now 80.2% of retail investors' CFD accounts lose money Crypto investments are managed by eToro (Europe) Ltd. Offered and custody is provided by eToro Germany GmbH.
Crypto and banks: bankruptcy is a sensitive topic
With last year's bank failures continuing into 2023, investors are naturally wondering, and rightly so, what happens when banks go bust. In fact, one's own capital can be well protected, especially at banks within the EU.
In the best case, bank customers should study the terms and conditions and deposit insurance information before setting up an account or deposit. Each bank is required to explain its deposit protection in detail.
If the bank becomes insolvent, the financial services provider must inform its customers promptly and make a withdrawal of capital within seven days. However, what bank customers can count on depends on the type of protection:
- Statutory deposit protection within the EU up to an amount of 100.000 euros
- Covering capital in checking, savings and clearing accounts, as well as overnight and time deposits
- Values in the securities account remain in the possession of the investor at all times
Bank failure is not yet over/ Image credit: Dmitry Tkachuk/ shutterstock.com
What do voluntary deposit protection funds provide?
Many banks like to refer to additional security measures such as voluntary memberships in deposit guarantee funds. However, funds and the amount of capital theoretically covered vary significantly. This is due to the diverse banking landscape, especially in Germany, which includes very different credit institutions:
- Savings banks
- Cooperative banks
- Private banks
- Public banks
They all do not use a single system, but have their own structures, security funds and specifications for each group. In addition, and this is not clear to many bank customers, there is no legal right to be covered by a voluntary protection fund. According to experts, those who want to protect their capital in the best possible way should spread it across different banks and thus stay under the limit of the statutory deposit insurance scheme.
Those concerned with the "gray area" of deposit insurance will be more vigilant in reading the fine print of supposedly low-cost offers – especially if the provider is not based within the EU.
Trade cryptos here now 80.2% of retail investors' CFD accounts are losing money Crypto investments are being made by eToro (Europe) Ltd. offered and the custody is carried out by eToro Germany GmbH.
Interaction of bank failure and crypto crash
With the establishment of trading opportunities for cryptocurrencies and an increasing interaction with fiat currencies and their institutions, things changed for bank customers – but also for crypto investors. The existing scenarios are basically as follows:
- Banks hold collateral in fiat currency for crypto-coins – these are usually so-called stablecoins. The issuer of tokens such as Tether or Celsius commits itself to hold one U.S. dollar for each unit and pay out investors upon request.
- Crypto platforms cooperate with fiat payment service providers, for example, to make the conversion and payout of balances in U.S. dollars, euros or British pounds convenient.
- Financial service providers offer hybrid models – in addition to regular current accounts, customers have access to crypto offerings, usually thanks to cooperation with a service provider that specializes in this area.
Even at first glance, it is apparent that such an intertwining of businesses offers many advantages, but can become a disadvantage in the event of insolvency. Especially crypto investors are left out in the cold, as their deposits are not protected by a deposit insurance scheme.
Bank failures and crypto crashes exert a reciprocal effect/ image source: Billion Photos/ shutterstock.com
Banks bankruptcy: who was affected in recent months?
2022 was not a good year for banks – and not for crypto markets either. Bitcoin gave up two-thirds of its price value after April 2022 and is far from its former all-time high in March 2023. The turmoil on the markets drove well-known crypto providers into insolvency, and in some cases German banks also went bust as a result. Conversely, bank failures also put crypto banks at risk.
Celsius Network: good interest rates for crypto lending
As early as June 2022, the U.S.-based provider Celsius had to freeze payouts to customers. The rapidly falling crypto prices and the collapse of the Terra Token put Celsius under strain. Yet the company's offer was quite interesting: investors could lend their crypto assets and receive attractive interest rates in return. A total of 12 billion. US dollar balances Celsius managed for customers. The company's cash identified after the bankruptcy was announced is nowhere near enough to cover this.
Trade cryptos here now 80.2% of retail investors' CFD accounts lose money Crypto investments are managed by eToro (Europe) Ltd. offered and custody is provided by eToro Germany GmbH.
Nuri Bank: collateral damage caused by Celsius
One of the first providers to flounder when crypto bank Celsius went bankrupt was Berlin-based FinTech Nuri. The company formerly known as Bitwalla enjoyed great popularity among investors. Through Nuri, customers had conventional, free current accounts including debit card, but could also create ETF savings plans and use so-called crypto income accounts. Celsius was behind the revenue accounts with its profitable lending of the coins. Nuri was forced to announce its bankruptcy. Fiat balances could be paid out to customers without further ado, how it looks with coins and tokens at Celsius remains to be seen.
FTX: crypto quake after stock market insolvency
One of the three largest cryptocurrency trading venues, FTX, is also among the financial services companies that were left behind in 2022. The "in-house" token FTT and crypto markets as a whole will be affected. That's because the exchange is one of the top three trading venues, along with Coinbase and Binance, and was used by more than a million crypto investors. A proposed takeover by Binance fell through. With the insolvency, the assets FTX held as reserves were freed up and flooded the markets – promptly causing prices to plummet.
Financial provider FTX also fell by the wayside in 2022/ Image source: Gunnar Pippel/ shutterstock.com
Binance UK: What's next for fiat payouts??
Binance also has a recurring problem with payouts, and it's in the U.K. The exchange's convenient offerings include easy, instant token conversion and payouts in pounds sterling. For this purpose, Binance cooperated with the payment service provider Skrill for a long time. There were already recurring payout freezes from 2021, and now Skrill has terminated its cooperation with the crypto exchange. It is still uncertain whether a comparable partner will be found on the British financial market. Customers' funds are not currently under threat, but tighter regulations are likely to make it much harder for the Brits to pay them out.
Silicon Valley Bank: Stable-Coin collateral under pressure
Consequences for crypto investors include the crash of Silicon Valley Bank. The big Santa Monica tech financier had to admit difficulties in early March 2023 and is now seeking an orderly bankruptcy. Those who have fiat money deposited with the big bank can access it – as the US banking regulator promptly transferred the company to a newly formed bank.
The situation is different with investors in the Stablecoin Circle. Like all such tokens, USDC is backed one-to-one by US dollars, according to the company behind it. A large part of this collateral was with SVB – 3.3 billion. US dollars, to be precise. Since Circle could not access these funds immediately after SVB's bank failure became known, the token dropped significantly in investor confidence.
Trade cryptos here now 80.2% of retail investor CFD accounts lose money Crypto investments are made by eToro (Europe) Ltd. Offered and custody is provided by eToro Germany GmbH.
Are bank failures inevitable? What experts think
As early as mid-2022, financial portals consulted experts on FinTechs, startups and crypto offerings and sought their opinions. After Nuri Bank's bankruptcy, a search for the causes began.
In fact, experts from the venture capital sector noted a still high demand especially for hybrid offerings. Nuri struck a chord with its mix of current accounts, crypto accounts and securities savings plans, and the fact that this model is now missing is regretted by the Berlin-based FinTech's former customers.
Most successful companies – and Nuri was one of them – proved to be disruptive innovators at launch, sending a jolt through the financial landscape. New FinTechs with a similar model would have good prospects.
The current situation, due to rising interest rates and inflation, makes it difficult for fiat banks and crypto providers, especially those breaking new ground. One challenge is that business models and processes are often new from the ground up.
Questions about "what if" are either not asked or could not be answered because role models are missing. At the same time, many financial service providers have grown explosively due to the high interest, putting the expansion of their customer base above break-even.
These weaknesses brought down more than one financial house in the months following the outbreak of war in Ukraine – and the wave has yet to fully break.
The current world situation is challenging for FinTechs, startups and crypto offerings/ Image source: Dimitry Tkachuk/ shutterstock.com
Bank failure: bankruptcy tears down stock prices
Those who deposit their capital at a bank with good deposit protection and also diversify crypto investments as much as possible can survive a bank failure without major damage. The situation is different for investors who hold the shares of an affected bank, such as Silicon Valley Bank.
Among those affected by the shock waves was Credit Suisse of Switzerland – the systemically important major bank had (once again) speculated and had to call on a protective umbrella from the National Bank. The share lost up to 30 percent in value.
Developments at Germany's DAX banks were similarly dramatic – shareholders of Deutsche Bank and Commerzbank dumped their share tokens at record speed from mid-March 2023, despite reassuring assurances from the ECB's top brass.
Trade cryptos here now 80.2% of retail investors' CFD accounts are losing money Crypto investments are being held by eToro (Europe) Ltd. offered and custody is provided by eToro Germany GmbH.
Trade bank stocks and crypto – with CFDs
It's no secret that the financial markets are going through troubled times right now. However, this does not mean that investors have to completely forgo the return potential of shares or cryptocurrencies.
Derivatives allow price speculation without buying the underlying asset – often at favorable conditions and with flexible design. In over-the-counter day trading, participants mainly use CFDs.
Contracts for Difference are becoming increasingly popular and have been increasingly offered on the rates of cryptocurrencies for some years now. Day traders appreciate the strengths of contracts for difference, including
- flexible entry and exit according to one's own wishes
- Long and short positions
- Leveraging the equity
- Trading all asset classes and risk levels with one instrument
Even beginners with a limited budget can achieve good returns – it is made possible by the broker's short-term loan, which is called leverage. Especially for volatile assets traders also use falling prices, as they are currently more common.
Taking up CFD trading should be done after thorough preparation, preferably with a reputable broker that makes educational resources and a demo account available to its customers.
Crypto prices can be traded well via CFDs/ image source: zakharchuk/ shutterstock.com
Conclusion: know the interactions of bank and crypto crashes
It is understandable that investors are concerned about the wave of bankruptcies in the financial sector – after all, large institutions are affected just as much as smaller FinTechs. In principle, there is nothing wrong with holding an account with the startup company.
However, reading the terms and conditions and the information on deposit protection is more than ever a must, as is the distribution of one's own capital. Those who do not want to commit themselves at present can instead speculate on selected underlying assets over limited periods of time, with contracts for differences.
- Mobile trading via app
- Unlimited demo account
- Favorable conditions
Test the broker now with free demo account! 80.2% of the accounts of small investors lose money when trading CFDs with this provider. You should weigh whether you can afford to take the high risk of losing your money.