Crypto companies stranded by banking partners – Cryptopolitan

In the wake of three major US crypto-friendly lenders collapsing last month, crypto firms find themselves in a precarious position as they search for new banking partners.

This situation is causing concern among US regulators, who are concerned about the potential risks associated with concentrating business in smaller financial institutions.

The downfalls of Silvergate Capital Corp, Signature Bank and Silicon Valley Bank have forced crypto companies to turn to alternative banking options as mainstream banks grow increasingly wary of their clients in the industry due to a series of high-profile failures and lack of regulation.

A shift to smaller financial institutions for crypto firms

As the search for banking partners intensifies, digital asset companies are turning to smaller financial institutions for support. These smaller institutions, often in more remote areas of global finance, are experiencing an increase in inquiries from potential customers.

Demand for their services has grown as larger banks become more reluctant to work with crypto customers, in part due to concerns about the safety and soundness of banking business models that focus heavily on these types of customers.

FV Bank in Puerto Rico, a US-licensed fintech-focused bank, reported a significant increase in inquiries from potential customers in recent weeks.

Despite not being insured by the Federal Deposit Insurance Corp, FV Bank is attracting attention from crypto firms due to its specialization in the fintech sector.

Similarly, Bank Frick in Liechtenstein has experienced a significant increase in account opening requests, with the majority of inquiries coming from firms in Europe, Singapore and Australia.

Regulatory concerns and concentration risk

The shift of crypto companies to smaller financial institutions means that regulators are increasingly concerned about the concentration risk associated with such a change.

This risk places greater expectations on these smaller firms to implement adequate risk management and monitoring procedures, which may prove to be a significant challenge for these institutions.

Nikki Johnstone, a partner at London law firm Allen and Overy, highlighted concentration risk as the main issue arising from the reduction in available digital asset banking options.

She explained that smaller firms need to ensure they have the necessary risk management and monitoring systems in place to cope with the increased demand.

The cautious approach of conventional banks

Many top-tier banks, including JPMorgan Chase and Bank of New York Mellon, have been cautious in their approach to working with crypto clients.

While they maintain relationships with a select few companies in the industry, such as Coinbase, they typically turn down potential crypto-related clients.

The reluctance of these larger banks to work with these firms can be attributed to the increased money laundering risk in the sector and the lack of robust regulation.

As a result, smaller crypto startups are finding it increasingly difficult to secure banking partners, leading to concerns about the availability of banking options for smaller and less proven businesses.

In light of the current banking landscape, crypto companies must now navigate the complex world of financial partnerships, working to secure the support of smaller financial institutions as regulators continue to express concerns about the risk of concentration.

This shift could also spur further discussions about the need for stronger regulation and oversight in the industry, as the relationship between crypto firms and their banking partners becomes increasingly crucial to the overall health and stability of the market.