After Crypto Blowups, Banks Are Wary About Serving Crypto Clients

Following a string of regional-lender failures, banks in the US are now even more hesitant to provide their services to the crypto industry after a slew of regulatory inquiries and the collapse of several regional-lenders. 

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Crypto firms are having difficulty finding new banks for their depository and payment services since Silvergate Capital Corp. closed its doors and Signature Bank was seized, both of which were crypto-friendly. Even though there is no blanket ban on financial firms serving crypto clients, the application process is lengthy, companies with smaller funding models and some retail platforms are being turned away, and some financial institutions have even closed their doors on crypto businesses altogether, as a number of industry participants, investors and bank executives have reported.  

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Upon a person with direct knowledge of the bank’s business, Cross River Bank, for instance, received requests from more than 100 new clients seeking safe haven for their deposits within days of SVB Financial Group’s Silicon Valley Bank and Signature collapsing. It is estimated that Cross River Bank received over 100 requests from new clients – not all of them crypto companies – within the next two weeks. The closely held company turned down almost all those requests, according to the person.

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According to Eden Hoffman, a spokesperson for the Fort Lee, New Jersey-based lender, the bank is only considering companies that have established relationships with Cross River that are blue-chip customers and integral to the fintech ecosystem. It is only after Silicon Valley Bank failed that stablecoin issuer Circle Internet Financial Ltd. won over the bank. This partnership has been announced after Silicon Valley Bank failed and the bank has extended its partnership with Cross River.

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The Federal Deposit Insurance Corporation specifically asked lenders not to take on the digital asset business when they were bidding to purchase failed Signature Bank earlier this month, according to a person who is familiar with the matter. As it turns out, Signature's crypto business was not part of New York Community Bancorp's eventual takeover, and the FDIC is still in pursuit of selling Signet, Signature's real-time payments network for crypto firms. 

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Nic Carter, general partner at crypto venture-capital firm Castle Island Ventures, noted that many banks are scared to put up their hand and say they are the ones serving the crypto industry. “I’ve seen what happened in the past few years, and no bank wants to be viewed as the next Silvergate or Signature,” Carter said.

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Taking on too many companies in one industry can lead to deposits becoming concentrated and liquidity risks building, said John Popeo, formerly a lawyer at the Federal Deposit Insurance Corporation.

A company called Silvergate, headquartered in La Jolla, California, that announced earlier this month it had decided to wind down its operations and liquidate its bank, had focused almost all its efforts and finances on serving the crypto industry.

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As a matter of fact, a spokesperson for the FDIC said the agency does not impose specific restrictions on banks regarding deposit categories or individual institutions' deposits. In the meantime, in a joint statement issued by the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency in January, the regulators were especially concerned with bank business models that were heavily exposed to the cryptocurrency market.

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There are some big banks that seem willing to do selective business with crypto firms, such as JPMorgan Chase & Co. and Bank of New York Mellon Corp. However, the onboarding process with large global banks seems to take quite some time — up to six months, according to Bobby Zagotta, the CEO of Bitstamp USA Inc. A variety of regional banks are being explored, including Accountant and Customers Bancorp Inc. in the US, and Silvergate and Signature among its banks in the UK and Canada, respectively. The crypto exchange is also looking into opening accounts with other regional banks.

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Customers President Sam Sidhu, in an interview with the Trade Algo, stated that after the failure of Silicon Valley Bank, the bank has been "opening up accounts at an alarming rate" for new customers from technology companies and venture capital firms. The Customers spokesperson did not provide any details on whether crypto firms were included in the company's policies.

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As far as JPMorgan is concerned, a representative declined to comment, whereas JPMorgan's CEO Jamie Dimon has been critical of cryptocurrencies, such as Bitcoin and others, for decades. A spokesperson for BNY Mellon also refused to comment, and MVB didn't respond to an email.

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A lender can decide how to view an individual crypto firm's deposits based on the nature of the company's business, such as whether the bank account is used for operating cash or for customer funds, according to Popeo. The Financial Crimes Enforcement Network, or FinCEN, has notified crypto firms that if they are registered as money-services businesses and hold a state money-transmitter license, it may be easier for them to open bank accounts at some banks, according to him. 

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As a result of the strained relationship between banks and crypto firms, Kristin Smith, CEO of the Blockchain Association, said this year's events have been particularly troubling. The banks themselves are often not forthcoming with the specific reasons they are rejecting the prospective clients, some of which are vague explanations that they do not do crypto companies, she said.

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According to Alex de Lorraine, chief operating officer and chief financial officer of Archblock, which develops decentralized financing systems and runs the stablecoin TrueUSD, Archblock attempted to open accounts with a number of banks such as HSBC Holdings Plc and JPMorgan for taxes and payrolls, but was turned down.

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He said the firm landed accounts at smaller regional banks, but he declined to name which banks, since he did not want to reveal his identity. The firm landed accounts at smaller regional banks, and he declined to specify which ones. 

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As far as Archblock is concerned, neither HSBC nor JPMorgan have provided any comment about the issue.