Crypto Remains Bank Sector Kryptonite as Lenders Turn Firms Away

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

A lot has changed over the course of 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 U.S. branch of mega-exchange Binance is struggling to find a bank for its customers, while the developer behind the since-collapsed Signature Bank’s 24/7 payment system, Signet, has called his platform’s formerly invaluable crypto services “a distraction,” emphasizing that no other banks have expressed any interest in implementing its real-time digital asset settlement system.

“It didn’t end well for Signature Bank, so that might cause some people to have a little bit of caution around 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 every three credit union executives (66%) express little to no interest in providing their members with innovative crypto products, citing volatility concerns.

Absent a reliable, regulated banking partner, crypto companies are being forced to hold both their own money and customer funds with third parties, which can slow down sending and moving 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 in time, the crypto sector pinned its hopes to Wyoming-chartered upstart Custodia Bank — only to have those hopes decisively dashed by a strongly worded 86-page rejection letter from the U.S. Federal Reserve System that unpacked a laundry list of “fundamental concerns” around any “business focused on crypto-asset-related activities.”

Wyoming Attorney General (AG) Bridget Hill, along with the rest of her department, took umbrage with the Fed’s no-holds-barred 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 its framework allowing certain crypto firms to qualify as state-chartered banks.

The filing alleges that the Fed has “expressed skepticism over the aptitude of ‘new’ state-chartered banks while allowing ‘old’ state-chartered banks like BNY Mellon to engage in substantially the same digital asset custody activity Wyoming SPDIs intend to engage in.”

Read more: Crypto’s Existential Crisis Continues as SEC Issues Investor Warning

Does Crypto Have a Future?

At crypto exchanges, bank accounts for corporate operations including payroll and one-off expenses are typically separate from those used for user deposits and trading.

The cryptocurrency sector’s banking problems related to user deposits and trading picked up steam following the downfall of Signature Bank and Silvergate Capital.

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

Silvergate shuttered SEN on March 3, before announcing the voluntary liquidation of its business on March 8.

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

See also: White House Economic Report Shifts Stance on Crypto From Neutral to Negative

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

Circle and BlockFi have until April 24 to respond to the lawmakers’ questions around the existence of any “mutual backscratching 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 around its broader, global business despite claims by both Binance and Binance.US that they are separately managed.

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

A Binance spokesperson told PYMNTS when reached for comment at the time, that the agreement between Binance and its U.S. operation is common in their industry, with Binance’s founders licensing the tech stack to other organizations that weren’t affiliated with the company.