The Rise of Crypto’s Shadow Bankers

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%.