The collapse of not one but three crypto lenders in the United States just last month has created a risk-averse environment in the banking sector, as no one wants to be over-leveraged in a highly volatile market. This leaves the crypto firms at the mercy of smaller financial institutions
Crypto firms have been isolated by major banking institutions for lending. The collapse of not one but three crypto lenders in the United States just last month has created a risk-averse environment in the banking sector, as no one wants to be over-leveraged in a highly volatile market. This leaves the crypto firms at the mercy of smaller financial institutions.
After the fall of crypto lenders like Silicon Valley Bank (SVB), Signature Bank, and Silvergate Capital Corp., US regulators have alerted the banking institutions regarding the risk profile associated with doing business with crypto-focused businesses.
US regulators have also cautioned the banks to be ready to manage the liquidity risks from crypto-related deposits. It could be another havoc if the depositors rush to withdraw their crypto assets in the form of real money.
Since November last year, due to the FTX bankruptcy and the absence of regulations, major banks have gotten extremely cautious of their exposure to the crypto industry and the risk associated with their crypto clients.
This risk-averse environment has sidelined the crypto players with a small list of financial institutions, including infamous institutions and even smaller than the digital asset companies themselves. Marcus Foster, head of the crypto facility at Coadec, a body representing UK-based startups, said that the digital asset and Web3 startups are complaining that they are unable to get a business bank account. He expressed his concerns that these situations are problematic and might get worse in the future.
What Worries the Banks
Swiss-based Arab Bank told the news outlet Reuters that it has witnessed a rise in requests to open business bank accounts from several US-based crypto funds or crypto venture capital. They have been denied services as the bank cannot onboard several crypto clients, as it will go beyond their limit of crypto exposure.
FV Bank, a US-licensed fintech-focused bank from Puerto Rico, said that it had received requests from many clients over the past weeks. They are not insured by the Federal Deposit Insurance Corp. They are also exposed to different types of risks other than the traditional banks as they work with a safety cushion of a fractional reserve system.
A spokesperson for Bank Frick from Liechtenstein also said that they had received massive amounts of requests for opening bank accounts, majorly from clients based out of Singapore, Australia, and Europe. The spokesperson pointed out that they have an extensively diversified business portfolio and are not so fully focused on the crypto sector.
A Hong Kong-based digital bank, ZA Bank, said they had encountered quadrupled requests from crypto firms willing to open accounts after the SVB collapse. But they are adamant about taking up only companies with a license to trade in digital assets.
Nikki Johnstone, a partner at the Allen and Overy law firm in London, said that the “concentration risk” of crypto firms looking out for smaller financial institutions is proving to be a blockade for the lowered crypto banking avenues. This endows the crypto firms with the responsibility to operate with proper risk management and monitoring processes. Paolo Ardoino, chief technical officer of Tether, a stablecoin with the largest market capitalisation, said that the motto of crypto was to replace the banks, but they are nowhere near to achieving this and might succeed. Tether was under investor scrutiny for irregularity in reserves.
What do the banking heavyweights have to say?
JPMorgan Chase is not signing any new clients that are focused on the crypto space from all across the globe. However, has a special criterion for a few firms like Coinbase, who have stated that they deposit the customers’ funds at the banks, said an anonymous source with deep knowledge about the longstanding policies of the bank.
Bank of New York Mellon said they are thoroughly analysing any crypto company that approaches the banks. They are “very, very rigid” in their selection process and onboard clients who pass the individual scrutiny, a source said.
Johnstone, the lawyer at Allen and Overy, said that banks are also alerted due to rising cases of money laundering through the crypto space and the inefficient regulatory framework to control them. Circle, the principal issuer of USD Coin, is the custodian of a reserve portion with the Customers Bank, and Gemini says that it is the custodian for a reserve of its stablecoin at State Street Bank and Goldman Sachs.