Crypto firms have been left scrambling to find banking partners after the collapse of three crypto-friendly lenders in the U.S. last month, creating a risk their business will become concentrated in smaller financial institutions.
It is a scenario that concerns U.S. regulators, who have expressed doubt about the safety and soundness of bank business models that are highly focused on crypto clients after Silvergate Capital Corp, Signature Bank and Silicon Valley Bank imploded.
U.S. regulators have also told banks to be alert for liquidity risks coming from crypto-related deposits, which could be subject to rapid outflows if customers try to redeem their crypto assets for real money.
Mainstream banks have become increasingly wary of crypto clients following a series of high-profile collapses, including the bankruptcy of major exchange FTX in November last year, and a lack of regulation.
"Crypto and Web3 start-ups are telling us they simply cannot get a business bank account," said Marcus Foster, head of crypto policy at Coadec, a body representing UK start-ups. Foster said the issue has become "significantly worse" recently.
This has left digital asset companies with little choice but to seek out smaller financial institutions, some in remoter corners of global finance.
A spokesperson for FV Bank, a U.S.-licensed fintech-focused bank in Puerto Rico, said that it has seen an uptick in inquiries from potential customers in recent weeks, even though it is not insured by the Federal Deposit Insurance Corp. The bank does not lend and is therefore not subject to the same type of risks as traditional banks that operate on a fractional reserve system, a spokesperson said.
In Liechtenstein, a spokesperson for Bank Frick said it has also experienced a "significant increase in account opening requests," with the largest portion of inquiries coming from firms in Europe, Singapore and Australia.
However, the bank is not purely focused on crypto and has a broadly diversified business model, the spokesperson said.
Switzerland-based Arab Bank told Reuters in March it had seen an increase in U.S. firms, mostly crypto funds or those involved in crypto venture capital, seeking to open accounts, but that the bank was unlikely to accommodate all of them.
While ZA Bank in Hong Kong, a digital bank, said it had seen about four times more enquiries from crypto firms seeking accounts after Silicon Valley Bank's collapse, although it said it would only accept firms licensed to trade virtual assets.
Nikki Johnstone, a partner at the Allen and Overy law firm in London, said that the "concentration risk" that comes from a growing number of clients seeking business from the smaller firms is the "biggest challenge" of having reduced crypto banking options.
"That places a greater degree of expectation on that firm to apply the right level of risk management and monitoring," she said.
Cryptocurrency companies need access to banks to hold customers' dollar deposits and for day-to-day business activities.
"Of course the motto of crypto is 'we are going to replace the banks', but first of all, we are not there yet, and I don’t think we will be there ever," said Paolo Ardoino, the chief technology officer of Tether, the largest stablecoin by market capitalisation, whose reserves have previously been the subject of investor scrutiny.
'Top Tier'
Several top banks told Reuters that they are currently turning most potential crypto-related customers away, while others said they are only working with top-tier firms - policies that most say are unchanged from their historical positions.
JPMorgan Chase is not onboarding any clients that are primarily crypto businesses anywhere in the world, according to a source familiar with the situation, with the exception of a select few firms including Coinbase, which has disclosed that it deposits customer funds at the bank.
The person said this policy has long been its stance.
A source familiar with the Bank of New York Mellon said that while the bank examines any crypto company that seeks to become a customer, it is "very, very rigid" in its vetting process and has only taken on clients on a case-by-case basis. Circle, the principal issuer of USD Coin, custodies a portion of its reserves with BNY Mellon.
A spokesperson for ING said the bank does not "target or focus actively on crypto firms" so its exposure is "very limited."
Allen and Overy lawyer Johnstone said that banks are often cautious due to the heightened money-laundering risk in the crypto sector and a lack of robust crypto regulation.
To be sure, some of the largest cryptocurrency companies have ongoing relationships with U.S. banks. Circle, the principal issuer of USD Coin, custodies a portion of its reserves with Customers Bank, and Gemini says it custodies the reserves for its stablecoin at State Street Bank and Goldman Sachs . Coinbase has disclosed that it deposits customer funds at Cross River Bank in addition to JPMorgan Chase.
But for smaller crypto start-ups, securing a banking partner could be more difficult, said Ricardo Mico, the U.S. CEO of Banxa, a payment and compliance infrastructure provider for crypto.
"There’s certainly a concern about a lack of banking partners available in the market now, notably for the smaller and less-proven ventures," he said.
(Reporting by Elizabeth Howcroft in London and Hannah Lang in Washington; additional reporting by Mehnaz Yasmin and Georgina Lee; Editing by Elisa Martinuzzi and Sharon Singleton)
19 Comments
With crypto not treated as a currency for tax purposes every minor purchase is a tax event. The admin around this is prohibitive for use as a day to day currency. In these circumstances it's much easier for people to exchange a lump sum occasionally and transact in fiat. As to what the usage as a currency would be with a level playing field, who knows.
"banks don't like competitors"? Really? there are a lot of banks out there, all very competitive.
There are 27 in New Zealand, 95 in Australia, 34 in Canada, 198 in Japan, 344 in the UK, 4844 in the US, and 5171 in the EU. Everywhere you look, banks are in very competitive situations.
The chairman of the SEC Gary Gensler was grilled in front of the U.S. Congress (House Financial Services Committee hearing) on Tues night. Among other issues, Crypto was front and center, particularly the SEC's war against the industry and the stifling of innovation. Gensler was all over the shop and was savaged by more than a few, particularly reps from the Republicans.
Gensler blamed the recent banking debacle of 3 U.S. banks on crypto, obviously with a reference to SVB.
Something is off about these narratives. The banks that collapsed were because of banking regulations which forced them to hold unrealized losses on government bonds. The issue of capital flight from banks isn't made better by trying to block bans from funding crypto. It is made worse, you are essentially incentivizing flight from those banks.
Does anyone believe governments around are going to let crypto cut in on their business once digital dollars come into play Bitcoin and most other crypto will be toast .
Rat poison is deemed a commodity in the U.S. F'more, it's not a 'business threat' to CBDCs. Never has been. And for your reference, most currencies are digital.
The U.S. Commodity Futures Trading Commission (CFTC) has been publicly advocating for quite some time that both Bitcoin and Ethereum (ETH) are commodities. However, that regulatory assessment appears to have changed radically yesterday.
Speaking at a crypto event at Princeton University, CFTC chairman Rostin Behnam stated that the only cryptocurrency that should be considered a commodity is Bitcoin. In doing so, he is doing a complete backpedal from previous statements when he implied that Ether is also a commodity.
https://bitcoinist.com/cftc-chair-only-bitcoin-is-a-commodity-not-ether…
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