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BANKS ARE BREAKING UP WITH CRYPTO DURING REGULATORY CRACKDOWN - WSJ

archived 16 Feb 2023 10:59:11 UTC
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* Markets
* | Currencies
* | Cryptocurrency

BANKS ARE BREAKING UP WITH CRYPTO DURING REGULATORY CRACKDOWN

SEC AND BANKING OVERSEERS STEP UP SCRUTINY FOLLOWING COLLAPSE OF FTX

Signature Bank has cut ties with the international business of the biggest
crypto exchange.
Photo: John Marshall Mantel/Zuma Press
.
By
Rachel Louise Ensign and
David Benoit
Feb. 16, 2023 5:30 am ET .

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.

.
Crypto imploded as investors lost faith in digital assets and the industry was
plagued with crisis. Unlike other collapses, this one has largely avoided
rippling into other markets. WSJ explains how crypto became so interconnected.
Illustration: Mallory Brangan
.
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.
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“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.

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.
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.
Advertisement - Scroll to Continue

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.
Silvergate is cutting jobs and shrinking its business in an effort to lower
costs.
Photo: Ariana Drehsler/Bloomberg News
.

Advertisement - Scroll to Continue

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.

SHARE YOUR THOUGHTS

How should banks handle their crypto exposure? Join the conversation below.
.
Advertisement - Scroll to Continue

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.”
—Mengqi Sun and Justin Baer contributed to this article.
Write to Rachel Louise Ensign at Rachel.Ensign@wsj.com and David Benoit at
David.Benoit@wsj.com
Tap to View
.

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