Banking chaos leaves crypto with dwindling options

(Bloomberg) — Crypto startups are looking for alternative banking solutions following the collapse of three U.S. banks with ties to the digital-asset industry and its backers.

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Years of regulatory scrutiny have effectively blocked most crypto firms from traditional banks. So the failure of Silicon Valley Bank has caused many groups’ day-to-day mechanics such as payroll and bill processing to change, while the closing of Silvergate Capital Corp. and Signature Bank have closed key off-and-on ramps between crypto and traditional currencies.

“Everyone is in limbo,” said Dan Matuszewski, co-founder of crypto investment fund CMS Holdings.

Now, crypto startups are weighing their options – many of which are likely to push the industry further into the fringes of the financial sector – including the creation of a community-driven credit union, launching a blockchain-based solution or even using crypto credit cards.

To be sure, venture capital firms help portfolio companies find new banking partners. Cross River Bank has emerged as a preferred option after it was reported that Circle Internet Financial Ltd. moved operations there from SVB, where it had invested 3.3 billion dollars.

But given most banks’ reluctance to cooperate, others are looking to take matters into their own hands, said David Pakman, managing partner at crypto VC firm Coinfund LLC. Chats between VCs, founders and others in the crypto community on platforms like Telegram boil down to a simple, urgent message, he said: “We need to build an alternative.”

An option on deck is a community-run credit union that can accept deposits and make loans. Proponents even argue that if it were a non-profit, deposits would be less exposed since it wouldn’t be investing like a traditional bank.

Another option would be to lean further into blockchain technology. If a crypto custody firm were to connect with a payroll provider, for example, there would be a way to at least pay employees by converting stablecoins to dollars.

“We know that quality custody exists in crypto,” Pakman said. But that may be a stretch, given the amount of distress caused by USD Coin’s recent de-pegging after Circle disclosed its exposure to SVB, he said.

A third option involves the use of business credit cards that allow holders to pay balances with crypto. Pakman said VCs have also been meeting with companies that previously offered credit cards with crypto rewards to see if such an option could be made available.

But any solution is likely to face the challenge of finding funding. Many of the VC firms that helped pour a record $31 billion into blockchain startups last year were also SVB investors who are likely to pull back on speculative investments. In addition, crypto VC funding had already fallen 75% in the fourth quarter compared to the previous year, according to research firm PitchBook, following crypto’s multiple explosions last year.

SVB was not “just another mom-and-pop bank around the corner,” but a hub of venture capital, said Edith Yeung, general partner at Race Capital. “I’m sure there were deals made last week that are now not going to happen.”

This week, US regulators assured SVB and Signature Bank depositors that they would have access to funds. But crypto firms still face many banking hurdles.

“It’s a good week for people to get their money back,” said Haseeb Qureshi, managing partner at VC firm Dragonfly. “It’s a bad week for crypto banking.”

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