Crypto is facing a banking crisis. For some it is a conspiracy

A group of Republican senators, led by Bill Hagerty of Tennessee, wrote a letter to bank regulators on March 9 supporting this interpretation. The statements issued by regulators have “caused banks to reconsider their decision to provide banking services to the crypto sector,” the letter claimed. “This coordinated behavior seems disturbingly reminiscent of Operation Choke Point.”

“Operation Choke Point 2.0 is very real,” says Caitlin Long, CEO of Custodia, the scorned bank. “Many banks have gone way back in their crypto activities… and many [crypto] companies ranging from small to very large are looking for bank accounts.”

Since January, Custodia has been inundated with inquiries from crypto companies looking for a banking partner, Long says, but without federal oversight it can only offer a limited range of US dollar services. Custodia is suing the Fed for rejection of its application for membership.

Others are less convinced by the Choke Point theory. Economist Frances Copolla, who worked in risk management for HSBC and the Royal Bank of Scotland, says she does not believe there has been a “coordinated attack on crypto” but that the failure of Silvergate and Signature is a reflection of the fragility of their operating models. Caleb Franzen, a corporate banking analyst at research firm Cubic Analytics, says talk of underhanded tactics among regulators is “pure speculation.”

But whether by accident or design, crypto is facing a banking crisis in the United States.

The closure of Silvergate and Signature has sent crypto companies scrambling for new banking partners. Circle Internet Financial, whose USDC stablecoin was temporarily delinked from the dollar due to exposure to Silvergate and SVB, arranged over the weekend to expand an existing relationship with BNY Mellon. But not everyone is home and dry; crypto investment companies MaiCapital and Digital Asset Capital Management have taken the search for new banking partners offshore, while trading platform LedgerX has been forced to find a new bank for the second time, after first switching from Silvergate to Signature. Neither company responded to a request for comment.

By virtue of the value they represent to banks, larger crypto companies will likely be able to keep their existing accounts in the US, Carter says, meaning US residents will still have access to crypto exchanges. But smaller companies “scramble”, he says. The result is likely to be that some businesses will migrate to countries with more favorable regulatory regimes; some will struggle to raise risk capital, which is conditional on access to banking services; and others won’t start at first, says Carter.

With the downfall of Silvergate and Signature, the only two banks that offer real-time payments anytime, any day, the 24/7 crypto industry will have to get used to operating at a different pace. For traders, this means an inability to exit bets outside normal banking hours, which is likely to create an additional level of volatility.

Swan Bitcoin’s Klippsten doesn’t buy into the idea that US regulators have launched a coordinated attack on the crypto industry, driven by “a man behind the curtain pulling the strings”. He is also more keen on the prospect of the companies “orphaned” by Silvergate and Signature finding new banking partners, saying “banks are usually happy to take your money.”

Klippsten is also sympathetic to regulators’ ambition to defend against fraud in the crypto sector. But the frustration, he says, is that legitimate crypto companies will be collateral damage.

“Because crypto is so shady and some of the businesses are so poorly run, the whole category is toxic — it’s a pile of dog shit, on average,” he says. “So it’s hard to ask a bank with hundreds of thousands of accounts to distinguish between good crypto businesses, run by grown adults, [and bad ones]. We are stuck and being painted with the same brush.”