Fewer banks accept crypto. Those who do may face greater risks.
Crypto firms had little to do with the recent banking turmoil, but with fewer banks willing to take business from the industry, there is a risk that the next crypto bank could be setting itself up for a crisis of its own.
It is already clear that the crypto bank title will not go to New York Community Bancorp (ticker: NYCB), which the Federal Deposit Insurance Corp. on Sunday said it would take over most of the accounts once belonging to Signature Bank (SBNY).
Signature had been one of the few institutions to accept deposits from the crypto industry, but the FDIC’s announcement pointedly stated that NYCB subsidiary Flagstar Bank would not take on $4 billion in deposits related to Signature’s digital banking business, which includes crypto.
Instead, those deposits will be returned by the FDIC directly to customers, who will presumably have to find a new bank willing to take them.
It is easier said than done. Crypto lost another option when Silvergate Capital (SI) announced it would wind down operations. And while SVB Financial Group (SIVB), whose Silicon Valley Bank also failed this month, was better known for tailoring its business to startups and venture capital firms, it also had some prominent crypto clients.
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As it stands, crypto firms are turning to a shorter and shorter list of custodians still willing to take their business. As of this month, according to a research note from Needham analyst John Todaro, these included major firms such as JPMorgan Chase ( JPM ), Bank of New York Mellon ( BK ) and lesser-known institutions such as New Jersey-based Cross River Bank and Customers Bancorp ( CUBI ).
Over the past few months, banking regulators have issued guidance that has made it much more difficult for some crypto startups to even get checking accounts. The regulators say they are not seeking to “de-bank” the sector, noting in the guidance that banks are not prohibited from providing services to any legitimate industry.
But with every bank that closes or chooses not to do business in crypto, businesses with digital assets become more concentrated in the remaining companies willing to take them. That’s a recipe for more failure, said Willamette University law professor Rohan Grey.
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“Whoever is the last person standing is going to be in the most difficult position,” said Grey, who has been a critic of much of the crypto industry.
This concentration risk is not so different from what faces community banks whose fates are tied to their local region’s economy. The difference with crypto is that since it has such rapid boom and bust cycles, any bank that makes the industry a large part of its deposits will undoubtedly go through a period of high stress, Gray said.
Linda Jeng, general counsel for the trade group Crypto Council for Innovation, wrote in an op-ed on Saturday that regulators should encourage banks to serve all industries, including crypto, to reduce concentration risk.
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Some industry advocates are already wary that regulators could pin at least some of the turmoil in the overall banking sector on them. Fair or not, regulators appear to be using the crisis to prolong the crackdown, analysts for Washington, DC-based Beacon Policy Advisors wrote in a research note on Monday.
“Whether digital asset markets were the initial catalyst to the current crisis is unlikely to matter,” the analysts wrote. “Given the instability of the traditional financial institutions that they are charged with protecting, Biden’s regulators will see this as further reason to be cautious in their approach to crypto.”
It’s only going to get harder for banks to stick their necks out for crypto firms.
Write to Joe Light at [email protected]
