Crypto remains banking sector Kryptonite

Crypto, once the cool kid, is now the one no one wants to play with.

A lot has changed over the past year, none of it very good for the digital asset industry.

Now, the sector increasingly finds itself without the critical banking partners necessary to work with fiat currency and accept dollar deposits in return for services or in exchange for tokens.

This, as the US branch of mega-exchange Binance struggles to find a bank for its customers, while the developer behind the since-collapsed Signature Bank’s 24/7 payment system, Signet, has called the platform’s previously invaluable crypto services “a distraction”. ,” emphasizing that no other banks have expressed interest in implementing their real-time digital asset settlement system.

“It didn’t end well for Signature Bank, so that might make some people a little cautious about it,” the developer said.

New PYMNTS research in the April 2023 report, “Credit Union Innovation: Bridging the Cryptocurrency Divide,” a PYMNTS and PSCU collaboration, confirms this broader market sentiment—finding that two out of three credit union leaders (66%) express little or no interest in providing its members with innovative crypto products, citing volatility concerns.

In the absence of a trusted, regulated banking partner, crypto companies are forced to hold both their own money and customer funds with third parties, which can slow down the sending and moving of funds.

See also: Can Crypto’s value proposition ever translate into real value?

An essential de-banking of crypto from 24/7 payment rails

For a brief moment, the crypto sector pinned its hopes on Wyoming-chartered upstart Custodia Bank – only to have those hopes dashed by a strongly worded 86-page rejection letter from the US Federal Reserve System that unpacked a laundry list of “fundamental concerns” around any “business focused on crypto-asset-related activities.”

Wyoming Attorney General Bridget Hill, along with the rest of her department, took issue with the feds’ proscribed response to Custodia’s application.

The Wyoming AG on Monday (April 10) filed an official request to intervene in the case between Custodia Bank and the Federal Reserve System, seeking to defend the framework that allows certain crypto firms to qualify as state-chartered banks.

The filing claims the Fed has “expressed skepticism about the suitability of ‘new’ state-controlled banks while allowing ‘old’ state-controlled banks like BNY Mellon to engage in substantially the same digital asset custody activity Wyoming SPDI intends to engage in.”

Read more: Crypto’s existential crisis continues as SEC issues investor warning

Does crypto have a future?

On crypto exchanges, bank accounts for business operations including payroll and non-recurring expenses are typically separate from those used for user deposits and trading.

The cryptocurrency sector’s banking woes related to user deposits and trading picked up after the fall of Signature Bank and Silvergate Capital.

The two banks specifically catered to digital asset businesses, with the aforementioned Signet platform and Silvergate’s own Silvergate Exchange Network (SEN) both giving crypto companies critical access to 24/7, 365 real-time payments outside of traditional banking hours.

Silvergate closed SEN on March 3, before announcing a voluntary winding down of operations on March 8.

New York financial regulators took over Signature on March 12, and when New York Community Bancorp-owned Flagstar Bank bought Signature Bank on March 20, it declined to acquire the lender’s crypto business.

See also: Economic report from the White House shifts stance on crypto from neutral to negative

A letter sent Sunday (April 9) by US Senator Elizabeth Warren and Representative Alexandria Ocasio-Cortez to both Circle CEO Jeremy Allaire and BlockFi CEO Zac Prince shows that the crypto company’s other banking relationships are also coming under scrutiny.

Circle and BlockFi have until April 24 to respond to lawmakers’ questions about the existence of any “reciprocal clawback arrangements” between their companies and the since-collapsed Silicon Valley Bank (SVB).

As PYMNTS reported, crypto exchange Binance.US is languishing without a banking partner due to ongoing regulatory concerns about its broader, global operations despite claims by both Binance and Binance.US that they are managed separately.

PYMNTS previously reported on how Binance allegedly created its US platform as a shield from regulators.

A spokesperson for Binance told PYMNTS when reached for comment that the agreement between Binance and its US operations is common in their industry, with Binance’s founders licensing the technology stack to other organizations that were not affiliated with the company.