Binance banking issues highlight a divide between crypto firms and banks

by Arthur · February 15, 2023

Binance, the world’s leading crypto exchange by trading volume, will temporarily suspend bank transfers in US dollars. The exchange stated in a tweet on February 6 that no other trading methods would be affected. The announcement came without explanation. However, the exchange’s CEO Changpeng Zhao noted in a tweet that only 0.01% of the exchange’s total users will be affected by the suspension, while assuring that they are looking to resolve the issue soon.

Recently, Binance faced related financial problems in the United States. On January 21, their SWIFT transfer partner, Signature Bank, announced that as of February 1, it would only accept trades from customers with US dollar bank accounts above $100,000. The bank had previously stated that it severely limits deposits from cryptocurrency consumers.

At the time, Binance stated that it was looking for a new SWIFT partner and that all SWIFT trades involving other currencies, as well as US dollar trades using credit or debit cards, will still be accepted.

Signature Bank’s latest action comes after it revealed plans to sell up to $10 billion in crypto deposits in December in an effort to reduce its exposure to the turbulent market changes. “We’re not a cryptocurrency bank. We don’t want to be committed to any particular sector or client,” Joe DePaolo, the bank’s CEO, said at the time.

A spokesperson for Binance told Cointelegraph, “We are pausing USD bank transfers while we upgrade our services. We have contacted affected users directly and apologize for any inconvenience this may cause,” adding:

“We are actively working to find an alternative solution for SWIFT bank transfers. We have since stopped all USD bank transfers while we work on upgrading the service. 0.01% of our average monthly users use US wire transfers.”

Nansen data shared with Cointelegraph shows that notable stablecoin moves include crypto trading group Jump withdrawing $160 million in stablecoins and Oapital, a digital asset investment firm, withdrawing $230 million.

Andrew Thurman, head of content at Nansen, told Cointelegraph, “Jump and Oapital are big players that routinely throw around big sums, and it’s hard to fully attribute the moves to the bank announcement. I would say the seven-day outflows might be a little high , but the 24-hour indications show that there is nowhere near panic.”

Turmoil in the crypto market makes banks cautious

Banks are generally hesitant to deal with digital assets, especially without uniform regulations governing the nascent market. In many countries in the EU, this turned into a total ban at national regulatory level until the Markets in Crypto-Assets package, a pan-European regulatory set for digital assets, comes into force.

For the banks, the most important thing is to remain part of the financial system, and if they feel they can be cut off because they took too much risk, they simply won’t take it to begin with.

Tony Petrov, head of legal at Compliance-as-a-service provider Sumsub, told Cointelegraph that the ongoing bear market is another reason behind the bank’s recent action, stating: “When the crypto market skyrocketed, some banks were simply squeezed into the open arms of crypto exchanges: They had no bad reputation, their open faces inspired trust, and the concern that most banks had little or no understanding of the crypto industry could not beat the unprecedented numbers of profits that could be made from crypto.” He continued:

“But the time to scatter stones may be replaced by the time to collect them. And now some banks that were actively involved in crypto may re-evaluate their involvement and change their policies.”

He added that crypto companies will make an effort to “reinstate their reputation, and for that they will need stricter compliance infrastructure. Ideally, some third parties guarantee the necessary levels of risk management, to harmonize the approaches of crypto exchanges and banks and to return mutual trust on both sides of global finance.”

Lars Seier Christensen, the founder of Saxo Bank, believes that the developments surrounding FTX and other crypto disasters, combined with the low volumes in the market, have damaged confidence in the industry. The banks believe that the benefits associated with crypto trading activity are not proportionate to the increasing regulatory and business risks.

Obviously, the more difficult access is, the fewer new customers and deposits will find their way to exchanges, adding to the problems they already have with low volume. Speaking about how crypto exchanges can reduce this obstacle, he explained:

“A number of credit card companies still support payments to companies that banks often restrict, such as gambling, adult sites and others. But the best the industry can do as a whole is to embrace and welcome clear rules and follow them strictly, as well as help shape them with their knowledge.”

Eddie Hui, CEO of crypto exchange platform MetaComp, told Cointelegraph that it is not unusual to see an increase in bank runs on exchanges where clients try to withdraw their cash at the same time.

Reducing your exposure to crypto and trying to diversify your customer base will reduce this risk. Understandably, it is a sensible decision to make for the banks and their shareholders, who may have been burned by the crypto market in 2022.

He added that in the case of Silvergate, the limit they imposed on transactions was under $100,000. Some exchanges may decide to aggregate withdrawals and to go “through scheduled withdrawals using a third-party payment company, but that can introduce additional costs, delays, operational burden and counterparty risk.”