Crypto companies left stranded by banking partners – Cryptopolitan

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

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

Silvergate Capital Corp, Signature Bank, and Silicon Valley Bank’s downfall have resulted in crypto companies being forced to turn to alternative banking options, as mainstream banks grow increasingly skeptical of their clients in the crypto industry due to a string 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 looking to smaller financial institutions for support. These smaller institutions, often in more remote areas of global finance, are experiencing a surge in inquiries from potential customers.

The demand for their services has grown as larger banks become more reluctant to work with crypto clients, in part due to concerns about the safety and soundness of bank business models that focus heavily on crypto clients.

FV Bank in Puerto Rico, a U.S.-licensed fintech-focused bank, reported a significant uptick 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 considerable 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 is causing regulators to become 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 the Allen and Overy law firm in London, highlighted the concentration risk as the most significant issue arising from the reduction in available crypto 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.

Mainstream banks’ cautious approach

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

While they do maintain relationships with a select few companies in the industry, such as Coinbase, they are generally turning away potential crypto-related customers.

The reluctance of these larger banks to work with crypto firms can be attributed to the heightened money-laundering risks 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 ventures.

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

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