Crypto firms are facing a challenge in finding banking partners after the collapse of three crypto-friendly lenders in the U.S. last month. This has created a risk that their business will become concentrated in smaller financial institutions. U.S. regulators are concerned about the safety and soundness of bank business models that are highly focused on crypto clients, and have told banks to be alert for liquidity risks coming from crypto-related deposits. 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.
Marcus Foster, head of crypto policy at Coadec, a body representing UK start-ups, said that “crypto and Web3 start-ups are telling us they simply cannot get a business bank account.” 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. However, this concentration risk is the “biggest challenge” of having reduced crypto banking options, according to Nikki Johnstone, a partner at the Allen and Overy law firm in London.
Several top banks have stated 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, with the exception of a select few firms including Coinbase, which has disclosed that it deposits customer funds at the bank. The Bank of New York Mellon is “very, very rigid” in its vetting process and has only taken on clients on a case-by-case basis. ING said the bank does not “target or focus actively on crypto firms” so its exposure is “very limited.”
Cryptocurrency companies need access to banks to hold customers’ dollar deposits and for day-to-day business activities. Paolo Ardoino, the chief technology officer of Tether, the largest stablecoin by market capitalisation, said that “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.”
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, according to 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.
FV Bank, a U.S.-licensed fintech-focused bank in Puerto Rico, 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. In Liechtenstein, Bank Frick 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. 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. 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.
The concentration of crypto business in smaller financial institutions is a concern for regulators. Banks are often cautious due to the heightened money-laundering risk in the crypto sector and a lack of robust crypto regulation. This makes it difficult for smaller crypto start-ups to secure a banking partner. However, for the larger cryptocurrency companies, ongoing relationships with U.S. banks have been established.
In conclusion, the recent collapse of three crypto-friendly lenders in the U.S. has created a challenge for crypto firms in finding banking partners. This has created a risk that their business will become concentrated in smaller financial institutions. U.S. regulators are concerned about the safety and soundness of bank business models that are highly focused on crypto clients. 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. This has left digital asset companies with little choice but to seek out smaller financial institutions, some in remoter corners of global finance. The concentration risk is the biggest challenge for having reduced crypto banking options.