(Bloomberg) -- US banks, already hesitant to work with crypto customers, are now even warier of providing services to the industry after a string of regional-lender collapses and amid heightened scrutiny by regulators.
The closure of crypto-friendly Silvergate Capital Corp. and seizure of Signature Bank has left crypto firms struggling to find new banks for depository and payment services. While there’s no blanket ban on serving crypto clients, financial firms are imposing lengthy application procedures, turning away smaller companies and some retail platforms, and in some cases shutting the door on crypto businesses altogether, according to industry participants, investors and bank executives.
Cross River Bank, for example, received requests from more than 100 new clients — not all of whom were crypto companies — seeking a safe harbor for their deposits within days of SVB Financial Group’s Silicon Valley Bank and Signature collapsing, according to a person with direct knowledge of the bank’s business. The closely held company turned down almost all those requests, the person said.
The bank is “only considering companies with existing relationships with Cross River that are blue-chip customers and integral to 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 that were bidding to buy failed Signature Bank from the Federal Deposit Insurance Corp. specifically asked not to take on the digital-assets business, 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 banks want to put up their hand and say, ‘We are the guy serving 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 the banks’ concerns are deposit concentration and liquidity risks if banks take on too many companies in a particular industry, according to John Popeo, formerly an FDIC lawyer and now a partner at Gallatin Group, which advises banks and other firms on regulatory issues. Indeed, La Jolla, California-based Silvergate, which decided earlier this month 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 doesn’t impose specific limits for banks on deposit categories or deposits from any individual institution. Nevertheless, in a January joint warning by the FDIC, Federal Reserve and Office of the Comptroller of the Currency, the regulators took particular issue with bank business models that had concentrated exposure to the crypto sector.
Some big banks, such as JPMorgan Chase & Co. and Bank of New York Mellon Corp., seem willing to selectively do business with crypto firms, though “the on-boarding process with large global banks is quite long” — up to six months, said Bobby Zagotta, chief executive officer of Bitstamp USA Inc. The crypto exchange had counted Silvergate and Signature among its banks, and is now using MVB Financial Corp. and Customers Bancorp Inc. in the US, while exploring opening accounts at other regional banks.
In a March 14 interview, Customers President Sam Sidhu said the bank has been “opening up accounts at a fever pitch” for new customers from technology and venture-capital firms after the failure of Silicon Valley Bank. A Customers spokesperson declined to comment on whether crypto firms were included.
A JPMorgan representative declined to comment, but CEO Jamie Dimon has been a longtime critic of Bitcoin and other cryptocurrencies. A BNY Mellon spokesperson declined to comment, and MVB didn’t 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, may 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 “slightly easier to open bank accounts” at certain firms, he said.
The strained relationships between banks and crypto firms “really started to escalate this year,” said Kristin Smith, CEO of the Blockchain Association. Banks themselves often aren’t forthcoming with the precise reasons they’re turning down the prospective clients, with some giving vague explanations that they “don’t do” crypto companies, she said.
Archblock tried to open accounts with big banks including HSBC Holdings Plc and JPMorgan for paying taxes and making payrolls, but was turned down, said Alex de Lorraine, chief operating officer and chief financial officer of the firm, which builds decentralized-finance systems and runs stablecoin TrueUSD.
“They don’t tell you directly 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.
Banks could face extra costs and burdens should a crypto client fall into distress or under regulatory scrutiny. Metropolitan Bank Holding Corp., for example, said it received extensive regulatory and law-enforcement queries about its former client Voyager Digital Ltd. after the crypto broker went bankrupt last July. The bank said in January it would stop serving crypto firms, and recently filed in court asking for reimbursement from Voyager of 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 operated SEN and Signet, respectively, two real-time payments networks that were widely used by crypto platforms, trading firms and stablecoin issuers to transfer money among one other, even outside regular business hours.
“There are other alternatives there that are small that could emerge as a next evolution of this kind of payments space, but it’s absolutely unclear to me who that might be, and based on what,” said Zagotta of Bitstamp. “From our conversations with our customers, we haven’t heard anyone who has a clear picture.”
Cross River Bank and Customers Bank are among firms offering real-time, 24-hour “on and off ramps” enabling the exchange of fiat currencies, such as US dollars, for crypto firms. But the network effect — meaning a particular platform has utility because a lot of crypto firms are on it — is hard to duplicate, given that individual banks are taking on a limited number of crypto firms as clients, said Carter of Castle Island Ventures.
“We would look back the last five years, last three years, as the golden era of traditional banks servicing crypto,” he said. “We are just in a new era that’s much more difficult for banks to service the crypto industry.”
--With assistance from Bre Bradham.
©2023 Bloomberg L.P.