After three crypto-friendly lenders in the US failed last month, crypto businesses were left scurrying to find banking partners, raising the possibility that customers will concentrate in smaller financial institutions.
In light of the failures of Silicon Valley Bank, Signature Bank, and Silvergate Capital Corp., U.S. regulators are concerned about the safety and soundness of bank business models that are heavily focused on cryptocurrency customers.
Additionally, American regulators have cautioned banks to watch out for deposits tied to cryptocurrencies since they may experience sudden withdrawals of cash if users attempt to convert them to fiat currency.
Due to a lack of regulation and a string of high-profile failures, such as the bankruptcy of major exchange FTX in November of last year, mainstream banks have grown increasingly wary of consumers who use cryptocurrency.
Marcus Foster, head of crypto policy at Coadec, an organization that represents UK start-ups, stated that crypto and Web3 start-ups are stating unequivocally that they are unable to open a corporate bank account. Foster claimed that recently, the problem has drastically gotten worse.
Due to this, organizations who deal in digital assets have no alternative but to look for smaller financial institutions, some of which are located in less developed parts of the global financial system.
Despite not being covered by the Federal Deposit Insurance Corp., a representative for FV Bank, a Puerto Rican bank with a fintech focus that holds a U.S. license, stated that the bank has noticed an increase in inquiries from potential clients recently. The bank doesn’t make loans, therefore it is not exposed to the same risk factors as conventional banks that use a fractional reserve structure, a spokesperson said.
A representative for Bank Frick in Liechtenstein stated that the company has also seen a “significant increase in account opening requests,” with the majority of queries coming from businesses in Europe, Singapore, and Australia.
However, the bank has a broadly diversified business plan and is not solely focused on cryptocurrencies, according to the spokeswoman.
In March, the Switzerland-based Arab Bank told Reuters that it had noticed an uptick in requests for accounts from American businesses, particularly crypto funds or venture capital firms, but that the bank was not likely to be able to accept all of them.
Although it said that it would only accept companies licensed to trade virtual assets, the digital bank ZA Bank in Hong Kong claimed that it had had almost four times as many inquiries from cryptocurrency firms seeking accounts since Silicon Valley Bank’s failure.
The biggest challenge of having fewer crypto banking options, according to Nikki Johnstone, a lawyer at the London law firm Allen and Overy, is the concentration risk brought on by an increase in clients seeking business from the smaller organizations.
This raises the bar for that company to implement the proper amount of risk management and monitoring, she said.
For daily operations and to hold customers’ dollar deposits, cryptocurrency businesses require access to banks.
According to Paolo Ardoino, chief technology officer of Tether, the largest stablecoin by market capitalization, whose reserves have previously come under investor scrutiny, “Of course the motto of crypto is that they are going to replace the banks but first of all, they are not there yet, and he doesn’t think they will be there ever.
‘TOP TIER’
The majority of prominent banks told Reuters that their current policies have not altered from their previous stances and that they are now turning away the majority of prospective crypto-related customers. Other top banks claimed they are only engaging with top-tier companies.
According to a source with knowledge of the matter, JPMorgan Chase is not onboarding any clients that are primarily cryptocurrency businesses anywhere in the world, with the exception of a small number of companies like Coinbase, which has acknowledged that it deposits customer funds at the bank.
They claimed that this policy has always been their position.
According to a person with knowledge of the Bank of New York Mellon, the bank evaluates any crypto firm that applies to become a client, but it is “very, very rigid” in its vetting procedure and has only taken on customers on a case-by-case basis. A portion of Circle, the main USD Coin issuer’s reserves are held in custody by BNY Mellon.
The bank’s involvement is very limited, according to an ING representative, because it doesn’t target or focus actively on crypto firms.
Banks frequently exercise caution, according to Allen and Overy attorney Johnstone, because of the increased risk of money-laundering in the cryptocurrency industry and its lack of effective crypto regulation.
Undoubtedly, several of the biggest crypto businesses maintain connections with American banks. Circle, the main issuer of USD Coin, says Customers Bank is the custodian of some of its reserves, and Gemini claims State Street Bank and Goldman Sachs are the custodians of its stablecoin’s reserves. Coinbase has revealed that, in addition to JPMorgan Chase, it now deposits customer money at Cross River Bank.
However, securing a banking partner may be more challenging for smaller crypto start-ups, according to Ricardo Mico, the U.S. CEO of Banxa, a provider of payment and compliance infrastructure for crypto.
In particular for the smaller and less-proven companies, he said, there is concern about the lack of banking partners available in the market at the moment.
