Crypto firms' de-banking escalates as banks reject applications due to liquidity and regulatory concerns

• The collapse of crypto-related companies, such as FTX, Three Arrows Capital, Voyager, etc., has spooked banks.

• Further failures of Silicon Valley Bank, Silvergate, and Signature bank have increased liquidity risk for banks.

• The Blockchain Association recently asked relevant authorities for documents relating to the de-banking of crypto firms.

The crypto market has been facing hurdle after hurdle since Q2 2022 when Three Arrows Capital collapsed, which worsened in November 2022 following the bankruptcy of FTX. This led to a number of crypto companies falling, probably influencing the shuttering of three major banks in the United States.

Banks stepping away from crypto companies

The collapse of FTX led to the bank run on Silvergate bank, which was considered to be one of the most crypto-friendly banking institutions. This event probably initiated a domino effect, bringing down Silicon Valley Bank as well. While the exposure to crypto was not stated to be the explicit reason, many banks have since preferred not to take the risk.

This is visible in the rejection of applications for crypto-affiliated businesses at the hands of banks. The collapse of the aforementioned banks also created a rise in demand, which is another reason for the rejections of applications. 

The likes of Cross River Bank received and rejected over 100 applications due to the increased liquidity pressure. Taking on excessive new clients could put liquidity risk on the banks, which is why only existing clients are being preferred by the bank right now.

In the case of Cross River Bank, USD Coin (USDC) issuer Circle remains to be associated with the bank. This is solely due to an existing relationship between the two, or else Circle, too, could have been rejected as a client. 

The reason behind this is the declining demand for USDC, which is visible in the market capitalization, i.e., circulation of the stablecoin. In the span of three weeks, the circulation has dropped by $10 billion to just 32 billion USDC.

However, apart from the liquidity risk concerns, banks are also rejecting applications due to the regulatory scrutiny that may come with a collapsed crypto company. As noted by Bloomberg, an instance of the same is Metropolitan Bank Holding.

The bank held accounts in the name of Voyager Digital and faced extensive queries following the lending platforms' bankruptcy. The financial impact was such that the bank stopped serving crypto firms this January.

Nevertheless, some banks are still willing to accept crypto companies, including the likes of JPMorgan Chase and BNY Mellon. In fact, Fidelity and BNY Mellon also offer custodial services for crypto assets, with even Nasdaq joining the list recently.

Discontinue crypto de-banking

Bringing up the same discussion recently, the Blockchain Association even submitted a Freedom of Information Act (FOIA) request to the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve and the Office of the Comptroller of the Currency.

The group requested access to the documents and communication concerning the de-banking of crypto firms. The Association claimed that crypto companies were denied opening new accounts, and accounts were also closed by banks. 

Blockchain Association stated this could have contributed to the three US banks' failure, with the CEO of the Association, Kristin Smith, demanding treatment equal to any other lawful business.