Crypto’s Bank Crisis is Forcing Firms into the Outer Reaches of Global Finance – That’s a Problem

The collapse of three crypto-friendly lenders in the U.S., Silvergate Capital Corp, Signature Bank, and Silicon Valley Bank, has forced crypto firms to search for new banking partners.

As a result, their business is now concentrated in smaller financial institutions, raising concerns among U.S. regulators.

Mainstream banks have become increasingly cautious with crypto clients due to high-profile collapses, such as FTX’s bankruptcy and a lack of regulation.

Marcus Foster, head of crypto policy at Coadec, said, “Crypto and Web3 start-ups are telling us they simply cannot get a business bank account,” indicating that the situation has recently worsened.

U.S. regulators have also advised banks to be alert for liquidity risks coming from crypto-related deposits, which could experience rapid outflows if customers try to redeem their crypto assets for real money.

Smaller Financial Institutions Experience Influx of Crypto Clients

With limited options, digital asset companies have turned to smaller financial institutions, some in more remote areas of global finance.

FV Bank in Puerto Rico, Bank Frick in Liechtenstein, and Arab Bank in Switzerland have all reported increased inquiries from potential customers.

ZA Bank in Hong Kong also experienced a surge in inquiries from crypto firms after Silicon Valley Bank’s collapse, though it will only accept licensed virtual asset trading firms.

These smaller institutions may not be insured by the Federal Deposit Insurance Corp and might not be subject to the same risks as traditional banks.

However, some of these banks, like Bank Frick, have broadly diversified business models, not solely focused on crypto.

Concentration Risk and the Importance of Risk Management

The growing number of clients seeking business from smaller firms creates a concentration risk, which Allen and Overy law firm partner Nikki Johnstone calls the “biggest challenge” of having reduced crypto banking options.

This places a higher expectation on the firms to apply the right level of risk management and monitoring.

Crypto companies rely on banks for holding customers’ dollar deposits and day-to-day business activities.

Paolo Ardoino, CTO of Tether, said, “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.”

The limited availability of banking partners, particularly for smaller and less-established crypto ventures, is a growing concern.

Major banks like JPMorgan Chase and Bank of New York Mellon have stringent vetting processes for crypto-related customers, with the latter only taking on clients on a case-by-case basis.

Some large cryptocurrency companies have ongoing relationships with U.S. banks, such as Circle with Customers Bank, and Gemini with State Street Bank and Goldman Sachs.

However, for smaller crypto start-ups, securing a banking partner could be more difficult, according to Ricardo Mico, the U.S. CEO 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.