The Middle East could prove a profitable oasis.
The dramatic collapse of Silicon Valley Bank (SVB), Signature Bank and the voluntary liquidation of Silvergate Capital’s banking arm are significant setbacks for crypto investors that could speed the migration of crypto businesses to more accommodating jurisdictions such as the Middle East from the US. Moreover, in the wake of the crisis, US venture capital (VC) funds are also intensifying their focus on the region, driven partly by the banking fallout and huge cash piles of the Gulf petrodollar economies, according to analysts.
What’s more, market watchers speculate that some Gulf sovereign wealth funds will move to consolidate their position in the VC space as a source of funding and active investors. It is unclear how Gulf funds view the demise of the banks. Still, Gulf investors have typically considered troubled lenders in developed markets as an investment opportunity in the past, people familiar with their financing strategy say. Abu Dhabi’s Mubadala sovereign wealth fund, which has $284 billion under management according to research firm Global SWF, has been particularly active in the US VC space.
Still, amid claims of mismanagement, critics argue that the US banks were overly focused on crypto and digital assets, and the fallout is a defeat for the crypto industry. And the recent de-pegging of the stablecoin USDC from the dollar has also dented confidence in the sector’s efficacy. They contend that crypto investors would be nursing significant losses if it were not for dollar-backed US Federal Reserve’s rescue funds.
The criticism has led some crypto insiders to claim that with continuing regulatory uncertainty, the U.S. has become ‘anti-crypto.’ However, earlier this week, a spokesperson for the New York Department of Financial Services, which shuttered Signature Bank, denied the accusations saying, "The decisions made over the weekend were not crypto-related.”
Increasingly negative sentiment associated with crypto in the US has been enough for many to consider countries such as the United Arab Emirates and Bahrain. Coupled with a robust banking sector, each is spending heavily on regulatory infrastructure with the ambition of becoming a major player in global crypto markets. That ambition is gaining further traction as popular cryptocurrencies such as bitcoin and ether held their value surging by approximately 18% and 15%, respectively, in the aftermath of SVB’s collapse.
Large US banks have been reluctant to work with crypto investors or smaller VC funds, and the three failed banks were considered crypto-friendly. But Michael Ashley Schulman, founding partner and chief investment officer at Running Point Capital Advisors, says the recent failures are less of a defeat for crypto than for the concept of crypto banks.
“Some would argue that the whole idea of crypto was to decentralize finance and disintermediate banks and that the idea of a crypto bank is tantamount to printing all your emails before reading them.”
As the US federal government and financial regulators continue to allay contagion fears and questions remain over access to capital, the Middle East looks in a strong position not only to welcome casualties of the crisis but equally as an enabler for its resolution.