Crypto firms scramble for banking partners as willing lenders dwindle
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[April 19, 2023] By
Elizabeth Howcroft and Hannah Lang
LONDON (Reuters) - Crypto firms have been left scrambling to find
banking partners after the collapse of three crypto-friendly lenders in
the U.S. last month, creating a risk their business will become
concentrated in smaller financial institutions.
It is a scenario that concerns U.S. regulators, who have expressed doubt
about the safety and soundness of bank business models that are highly
focused on crypto clients after Silvergate Capital Corp, Signature Bank
and Silicon Valley Bank imploded.
U.S. regulators have also 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 regulation.
"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, a body representing UK start-ups. Foster said the issue has
become "significantly worse" recently.
This has left digital asset companies with little choice but to seek out
smaller financial institutions, some in remoter corners of global
finance.
A spokesperson for FV Bank, a U.S.-licensed fintech-focused bank in
Puerto Rico, said that it has seen an uptick in inquiries from potential
customers in recent weeks, even though it is not insured by the Federal
Deposit Insurance Corp. 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 spokesperson said.
In Liechtenstein, a spokesperson for Bank Frick said it has also
experienced a "significant increase in account opening requests," with
the largest portion of inquiries coming from firms in Europe, Singapore
and Australia.
However, the bank is not purely focused on crypto and has a broadly
diversified business model, the spokesperson said.
Switzerland-based Arab Bank told Reuters in March it had seen an
increase in U.S. firms, 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.
While ZA Bank in Hong Kong, a digital bank, said it had seen about four
times more enquiries from crypto firms 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 that the "concentration risk" that comes from a growing number of
clients seeking business from the smaller firms is 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.
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Souvenir tokens representing
cryptocurrency Bitcoin plunge into water in this illustration taken
May 17, 2022. REUTERS/Dado Ruvic
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, the chief technology
officer of Tether, the largest stablecoin by market capitalisation,
whose reserves have previously been the subject of investor
scrutiny.
'TOP TIER'
Several top banks told Reuters that they are currently turning most
potential crypto-related customers away, while others said they are
only working with top-tier firms - policies that most say are
unchanged from their historical positions.
JPMorgan Chase is not onboarding any clients that are primarily
crypto businesses anywhere in the world, according to a source
familiar with the situation, with the exception of a select few
firms including Coinbase, which has disclosed that it deposits
customer funds at the bank.
The person said this policy has long been its stance.
A source familiar with the Bank of New York Mellon said that while
the bank examines 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. Circle, the principal
issuer of USD Coin, custodies a portion of its reserves with BNY
Mellon.
A spokesperson for ING said the bank does not "target or focus
actively on crypto firms" so its exposure is "very limited."
Allen and Overy lawyer Johnstone said that banks are often cautious
due to the heightened money-laundering risk in the crypto sector and
a lack of robust crypto regulation.
To be sure, some of the largest cryptocurrency companies have
ongoing relationships with U.S. banks. Circle, the principal issuer
of USD Coin, 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 in addition to
JPMorgan Chase.
But for smaller crypto start-ups, securing a banking partner could
be more difficult, said 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.
(Reporting by Elizabeth Howcroft in London and Hannah Lang in
Washington; additional reporting by Mehnaz Yasmin and Georgina Lee;
Editing by Elisa Martinuzzi and Sharon Singleton)
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