Banks Warier to Serve Crypto Customers After Explosions, Scrutiny

by Arthur · March 30, 2023

(Bloomberg) — U.S. banks, already hesitant to work with crypto clients, are now even more cautious about offering services to the industry after a series of regional lending collapses and under increased scrutiny from regulators.

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The shutdown of crypto-friendly Silvergate Capital Corp. and the seizure of Signature Bank has left crypto firms struggling to find new banks for custody and payment services. While there is no blanket ban on serving crypto clients, financial firms impose lengthy application procedures, reject smaller companies and some retail platforms, and in some cases close the door to crypto businesses altogether, according to industry participants, investors and bank executives.

Cross River Bank, for example, received requests from more than 100 new customers — not all of them crypto companies — seeking a safe haven for their deposits within days of the collapse of SVB Financial Group’s Silicon Valley Bank and Signature, according to a person with direct knowledge of the bank’s operations . The closely held company turned down almost all of those requests, the person said.

The bank “only considers companies with existing relationships with Cross River that are blue-chip clients and integrated into the fintech ecosystem,” said Eden Hoffman, a spokesperson for the Fort Lee, New Jersey-based lender. Among the few crypto companies that have won over the bank is stablecoin issuer Circle Internet Financial Ltd., which expanded a partnership with Cross River, announced after Silicon Valley Bank failed.

Earlier this month, lenders bidding to buy failed Signature Bank from the Federal Deposit Insurance Corp. specifically about not taking on digital assets, according to a person familiar with the process. Signature’s crypto business was not part of the eventual takeover by New York Community Bancorp, and the FDIC is still seeking to sell Signet, Signature’s real-time payments network for crypto firms.

“No bank wants to put their hand up and say, ‘We’re the guy servicing the crypto industry,’ because they saw what happened,” said Nic Carter, general partner at crypto venture capital firm Castle Island Ventures. “No bank wants to be considered the next Silvergate or Signature.”

Among banks’ concerns are deposit concentration and liquidity risk if banks take on too many companies in a particular industry, according to John Popeo, a former FDIC attorney and now a partner at the Gallatin Group, which advises banks and other firms on regulatory issues. In fact, La Jolla, California-based Silvergate, which earlier this month decided to wind down operations and liquidate its bank, had bet almost its entire business on serving the crypto industry.

An FDIC spokesperson said the agency does not impose specific limits on banks on deposit categories or deposits from any individual institution. Nonetheless, in a joint warning from the FDIC, the Federal Reserve and the Office of the Comptroller of the Currency, regulators took particular issue with banking business models that had concentrated exposure to the crypto sector.

Some large banks, such as JPMorgan Chase & Co. and Bank of New York Mellon Corp., seem willing to selectively do business with crypto firms, although “the onboarding process with major global banks is quite long” – up to six months, said Bobby Zagotta, CEO of Bitstamp USA Inc. The crypto exchange had counted Silvergate and Signature among its banks, and now uses MVB Financial Corp. and Customers Bancorp Inc. in the United States, while exploring opening accounts in other regional banks.

In a March 14 interview, customer president Sam Sidhu said the bank has been “opening accounts in a frenzy” for new clients from technology and venture capital firms following the failure of Silicon Valley Bank. A customer spokesperson declined to comment on whether crypto firms were included.

A representative from JPMorgan declined to comment, but CEO Jamie Dimon has been a longtime critic of Bitcoin and other cryptocurrencies. A spokesperson for BNY Mellon declined to comment, and MVB did not respond to a request for comment.

The nature of an individual crypto firm’s business, such as whether the bank account is for operating cash or customer funds, can dictate how a lender will view its deposits, according to Popeo. Crypto firms that are registered as money services businesses with the Financial Crimes Enforcement Network, or FinCEN, and maintain state money transmitter licenses, may find it “a little easier to open bank accounts” with certain firms, he said.

The strained relationship between banks and crypto firms “really started to escalate this year,” said Kristin Smith, executive director of the Blockchain Association. The banks themselves are often not forthcoming with the exact reasons they are turning away potential clients, with some giving vague explanations that they “don’t do” crypto companies, she said.

Archblock tried to open accounts with major banks, including HSBC Holdings Plc and JPMorgan to pay taxes and pay salaries, but was rejected, said Alex de Lorraine, CEO and CFO of the firm, which builds decentralized financial systems and operates stablecoin TrueUSD.

“They don’t directly tell you why — we got a generic email saying, ‘Sorry, we can’t open an account for you at this time,'” he said. The firm landed accounts at smaller regional banks, which he declined to name .

Representatives for HSBC and JPMorgan declined to comment on Archblock.

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Banks may face additional costs and burdens should a crypto client end up in distress or under regulatory scrutiny. Metropolitan Bank Holding Corp., for example, said it received extensive regulatory and law enforcement inquiries about its former client Voyager Digital Ltd. after the crypto broker went bankrupt in July last year. The bank said in January it would stop servicing crypto firms, and recently filed a lawsuit seeking reimbursement from Voyager for legal fees it incurred responding to government inquiries.

The collapse of Silvergate and Signature has also made it difficult for crypto platforms and investors to transfer traditional currencies. The two banks respectively operated SEN and Signet, two real-time payment networks that were widely used by crypto platforms, trading firms and stablecoin issuers to transfer money between each other, even outside regular business hours.

“There are other options out there that are small that could emerge as a next evolution of this kind of payment space, but it’s certainly unclear to me who that might be, and based on what,” Bitstamp’s Zagotta said. “From our conversations with our customers, we haven’t heard from anyone who has a clear picture.”

Cross River Bank and Customers Bank are among firms offering real-time, 24-hour “on and off ramps” that enable the exchange of fiat currencies, such as the US dollar, for crypto firms. But the network effect — meaning a particular platform benefits because many crypto firms are on it — is hard to duplicate, given that individual banks take on a limited number of crypto firms as clients, said Carter of Castle Island Ventures.

“We will look back at the last five years, the last three years, as the golden era for traditional banks serving crypto,” he said. “We’re just entering a new era where it’s much harder for banks to serve the crypto industry.”

–With help from Bre Bradham.