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.
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.
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