Crypto companies are looking for banking partners after the collapse of three crypto-friendly lenders in the US last month, raising the risk the business will become concentrated in smaller financial institutions.
The scenario concerns US regulators, who have expressed doubt about the safety and soundness of bank business models that are highly focused on crypto clients after Silvergate Capital, Signature Bank and Silicon Valley Bank imploded.
Regulators have 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 regulations.
"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, which represents UK start-ups.
He said the issue had become "significantly worse" recently.
This has left digital asset companies with little option but to seek out smaller financial institutions, some in more remote corners of global finance.
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Changpeng Zhao, founder and chief executive of Binance, is the world’s richest crypto billionaire with a net worth of $65 billion. Bloomberg -
Sam Bankman-Fried, founder and chief executive of FTX cryptocurrency exchange, ranked as the second-wealthiest crypto billionaire with a personal fortune of $24bn. Bloomberg -
Brian Armstrong, co-founder of Coinbase, is the third-wealthiest crypto billionaire with a net worth of $6.6bn. Bloomberg -
Gary Wang, co-founder of FTX cryptocurrency exchange, ranked fourth with a net worth of $5.9bn. FTX -
Chris Larsen, executive chairman of Ripple’s board of directors and former chief executive and co-founder of Ripple, rounded out the list of top five wealthiest crypto billionaires with a fortune of $4.3bn. Ripple -
Song Chi-hyung, founder of Upbit, the largest cryptocurrency exchange in South Korea, has a net worth of $3.7bn. Courtesy: Dunamu -
Tyler Winklevoss, chief executive and co-founder of Gemini Trust, left, and Cameron Winklevoss, president and co-founder of Gemini Trust, have a net worth of $4bn each. Bloomberg -
Barry Silbert, founder and chief executive of Digital Currency Group, has a net worth of $3.2bn. Bloomberg -
Jed McCaleb, founder and chief architect of the Stellar Development Foundation and co-founder of Ripple, has a net worth of $2.5bn. Courtesy: Stellar Development Foundation
A representative for FV Bank, a US-licensed FinTech-focused bank in Puerto Rico, reported an increase in inquiries from potential customers in recent weeks, even though it was not insured by the Federal Deposit Insurance.
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 representative said.
In Liechtenstein, a representative of Bank Frick said it also experienced a "significant increase in account opening requests", with the largest portion of inquiries coming from companies in Europe, Singapore and Australia.
However, the bank is not focused purely on crypto and has a broadly diversified business model, the representative said.
Switzerland-based Arab Bank said in March that it had seen an increase in US companies, 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.
ZA Bank in Hong Kong, a digital bank, reported about four times more enquiries from crypto companies 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 the "concentration risk" that came from a growing number of clients seeking business from the smaller companies was 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, chief technology officer of Tether, the largest stablecoin by market capitalisation, whose reserves have previously been the subject of investor scrutiny.
Several top banks said they were currently turning most potential crypto-related customers away, while others said they were only working with top-tier firms — policies that most say are unchanged from their historical positions.
JP Morgan Chase is not taking on any clients that are primarily crypto businesses anywhere in the world, according to a source, with the exception of a select few firms, including Coinbase, which has disclosed that it deposits customer funds at the bank.
The source said this policy had long been its policy.
While the Bank of New York Mellonexamines 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, a source said.
Circle, the principal issuer of USD Coin, custodies a portion of its reserves with BNY Mellon.
A representative for ING said the bank did not "target or focus actively on crypto firms", so its exposure was "very limited".
Banks are often cautious due to the heightened money-laundering risk in the crypto sector and a lack of robust crypto regulation, said Ms Johnstone of Allen and Overy.
Some of the largest cryptocurrency companies have continuing relationships with US banks.
Circle 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, as well as JP Morgan Chase.
But for smaller crypto start-ups, securing a banking partner could be more difficult, said Ricardo Mico, the US chief executive 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.
