As the crypto industry strives to create its own financial system, companies still rely on traditional banks for everything from on-ramps for customers to payroll to office expenses.
While many banks are skittish about crypto companies, just as they are for industries such as cannabis and pornography, several built their business models around working with the volatile sector.
The strategy paid off during crypto’s boom cycle, but now two major crypto banks—Silvergate and Signature—are having second thoughts due to blows to their balance sheets and regulatory uncertainty. Experts tell Fortune that the pullback from financial institutions could spell trouble for the already reeling industry.
‘A real liability’
Joseph Silvia, the former counsel to the Federal Reserve Bank of Chicago and a partner at Dickinson Wright, said that banks not only provide essential services like payment rails and custodial offerings for crypto companies, but also security and legitimacy.
A chief example is New York-based Signature Bank, which established itself as a crypto ally with nearly a quarter of its $103 billion in deposits coming from crypto firms as of September 2022. Today, as bankruptcies roil the industry, Signature has been rethinking its association. Over the weekend, one of its clients—Binance, the world’s largest exchange—sent a notice to customers that Signature would no longer process SWIFT fiat transactions for individuals of less than $100,000 starting at the beginning of February.
SWIFT is a global messaging network that allows banks and financial firms to execute transactions and payments between themselves.
As a result, Binance said, some users may not be able to complete bank transfers to buy or sell crypto with U.S. dollars. The company added that it was looking to find other solutions and told Bloomberg that only 0.01% of its average monthly users are serviced by Signature Bank.
Whatever the impact on Binance, the episode reflects a broader trend amid crypto banking.
“Whatever premium existed for U.S.-banks in the crypto-space in past years has now turned into a very real liability,” said Ben McMillan, the CIO and co-founder of the investment platform IDX Digital Assets.
Signature had already been scaling back its crypto exposure, announcing in December that it would shrink its deposits tied to cryptocurrencies by $8 billion to $10 billion. Its share price had dropped by over 65% since February.
“We are not just a crypto bank and we want that to come across loud and clear,” Joe DePaolo, Signature’s CEO, said at the time.
The move was not enough to stem Signature's losses. In January, the bank reported a 17% year-over-year drop in deposits, the first time the bank had reported an annual decline since it began in 2001.
Signature is not alone. Silvergate, another crypto-friendly bank, reported a $1 billion loss for the fourth quarter of 2022, with 90% of the bank’s deposit base coming from crypto firms.
Retail shockwaves
After months of bankruptcies and hacks, the withdrawal of banking partners could further dissuade retail investment. Silvia, the former Federal Reserve counsel, said the potential removal of an easy on-ramp between customers and crypto exchanges is just another factor that will keep retail investors away.
“I feel like [customers] are looking to sit back on the sidelines for now,” he said.
McMillan, the IDX co-founder, added that Signature's decision could limit new entrants into the space.
Banks’ hesitance to operate in the crypto sector will likely grow as regulators increase their oversight. In January, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency issued a joint statement outlining risks associated with crypto assets and advising that it would monitor exposure and safety concerns.
Lawmakers have also scrutinized crypto banking. Senator Elizabeth Warren (D-Mass.) warned of the dangers of crypto becoming intertwined with the banking system after the Wall Street Journal revealed that Signature and Silvergate were borrowing billions of dollars from Federal Home Loan Banks, an association of government-sponsored banks, in response to customer deposit withdrawals.
As a result, Silvia said that traditional banks are rethinking their approach to crypto.
“There’s just too much negativity that is going on,” he told Fortune.
