​US banks begin to stop cooperating with crypto companies

Banks are backing away from crypto companies, spooked by a regulatory crackdown that threatens to sever digital currencies from the real-world financial system.

Banking regulators are raising concerns about banks’ involvement with crypto clients following last year’s blowup of Sam Bankman-Fried’s FTX. The Securities and Exchange Commission is aggressively pursuing the industry’s bigger players in a crackdown that threatens to narrow their reach. That move has alarmed bankers who don’t want to do business with customers in the SEC’s crosshairs, people familiar with the matter said.

Now bankers are re-evaluating any exposure to the crypto sector, no matter how small, according to people familiar with their thinking. The few smaller banks that got deep into crypto are reducing their exposure to the market or cutting ties altogether. Banks that kept their distance from crypto are trying even harder to stay away, closing accounts and shunning customers with potential connections to the industry.

New York’s Metropolitan Commercial Bank recently announced that it was closing its crypto business, citing material changes in the regulatory environment. Signature Bank cut ties with the international business of Binance, the biggest crypto exchange. The lender, one of crypto’s leading banks, started paring back its relationships with crypto depositors late last year.

The crackdown is squeezing crypto businesses. While the industry often pitched itself as an alternative to banks, these firms still rely heavily on banks to link up with a financial system that runs on hard currencies such as dollars and euros. Without banks, crypto companies struggle to pay their employees and enable customers to move money in and out of digital currencies.

“If you don’t have a bank account, it’s very hard to do business,” said Scott Shay, Signature’s chairman.

When bitcoin first gained popularity years ago, it was difficult for crypto firms to open bank accounts. A handful of smaller lenders, struggling to compete with big banks for deposit dollars, opened their doors, often banking only the bigger crypto players they thought were safest.

These banks don’t hold digital currencies. Instead, they provide corporate accounts for crypto companies. Some, such as Silvergate Capital Corp., also built special networks to enable transfers between big investors and crypto exchanges.

For a time, banking regulators warmed to crypto activities. In 2020, the Office of the Comptroller of the Currency said it would allow banks to hold cryptocurrencies for customers.

Regulators reversed course following the FTX meltdown. In January, the three major banking regulators warned banks that they were concerned about their crypto ties. The regulators said they had “significant safety and soundness concerns” and questioned if the industry could be safely banked.

“That was a red flare that went up that basically says, ‘Banks, if you’re going to be anywhere near the crypto business, we’re going to be looking at you very carefully,’” said Thomas Vartanian, executive director of the Financial Technology and Cybersecurity Center. “At the end of the day, banks are going to have to ask themselves if it’s worth the aggravation.”

Regulators generally don’t tell banks that they can’t do business with customers operating legitimate businesses. Instead, they categorize customers as higher-risk through formal public statements reinforced in feedback from the examiners who burrow into their operations to make sure they are not taking undue risks. Banks often then decide these customers aren’t worth the regulatory headache and cut them off.

Citigroup Inc. abruptly closed Swan Bitcoin’s account last November, said Cory Klippsten, chief executive of the bitcoin trading platform, forcing him to scramble to pay his 100 employees. Citigroup investment bankers who had been pitching to work with him tried to intervene but were unsuccessful, he said. Soon afterward, Mr. Klippsten said, his personal accounts at Citigroup were closed, too. He said he was never offered an explanation.

Matthew Homer, a former regulator who is now advising and investing in crypto firms, said his clients are having a difficult time landing bank accounts. A First Republic representative told Mr. Homer the bank avoids companies linked to crypto. Mercury, a banking service for startups, asks if a business is related to crypto in the sign-up process, Mr. Homer said.

A spokesman for Mercury said it conducts more due diligence on these businesses because of regulatory uncertainty. A representative for First Republic declined to comment.

Signature is the highest-profile bank to retreat from the crypto market. In early 2022, 27% of its $109 billion in deposits were from its digital-asset clients. The bank last year announced plans to pare back the share of deposits that come from the crypto business to less than 15% and to cap the amount of deposits from any individual crypto customer.

Regulators didn’t tell them to back away, but the bank felt they “agreed with what we were doing,” Chief Executive Joe DePaolo said.

He and Mr. Shay, the bank’s chairman, said they don’t regret getting into crypto, even if they are now spending a lot of time reassuring their customers in other industries about their exposure. They believe the blockchain technology behind the payments network popular with crypto customers is relevant to companies such as payroll providers and cargo shippers.

Some banks, meanwhile, are sticking with crypto.

Silvergate went all-in on crypto and doesn’t have the other revenue sources, as Signature does. It lost the bulk of its crypto deposits in a run on the bank last quarter and is cutting jobs and shrinking its business in an effort to lower costs. Silvergate said it remains committed to serving crypto companies.

Yet doors are closing for new entrants. Two companies trying to win banking licenses have been left in limbo after winning preliminary approval in early 2021 from the OCC. Paxos National Trust and Protego Trust Co. applied to start banks that would hold crypto assets for clients and facilitate trading.

Protego’s conditional charter expired recently. Paxos said in a statement on Twitter that it continues to “work constructively with the OCC.”

This material is taken from the website wsj.com.