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Crypto Faces a Banking Crisis


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A group of Republican senators, led by Bill Hagerty of Tennessee, penned a letter to the banking regulators on March 9, supporting this interpretation. The statements issued by regulators have “caused banks to reevaluate their decision to provide banking services to the crypto sector,” the letter claimed. “This coordinated behavior seems disturbingly reminiscent of Operation Choke Point.”

“Operation Choke Point 2.0 is very real,” says Caitlin Long, CEO at Custodia, the spurned bank. “Many banks have stepped way back in their crypto activities … and a lot of [crypto] companies ranging from small to very large are looking for bank accounts.”

Since January, Custodia has been inundated with enquiries from crypto companies looking for a banking partner, Long says, but without federal supervision it can only offer a limited selection of US dollar services. Custodia is suing the Fed over the denial of its application for membership.

Others are less convinced by the Choke Point theory. Economist Frances Copolla, who worked in risk management for HSBC and the Royal Bank of Scotland, says she doesn’t think there has been a “coordinated attack on crypto,” but that the failure of Silvergate and Signature is a reflection of fragilities in their operating models. Caleb Franzen, a corporate banking analyst at research firm Cubic Analytics, says talk of underhanded tactics among regulators is “purely speculation.”

But whether by accident or design, crypto is facing a banking crisis in the US.

The closure of Silvergate and Signature has sent crypto businesses hunting urgently for new banking partners. Circle Internet Financial, whose USDC stablecoin was knocked temporarily off its peg to the dollar by word of exposure to Silvergate and SVB, arranged over the weekend to expand an existing relationship with BNY Mellon. But not everyone is home and dry; crypto investment firms MaiCapital and Digital Asset Capital Management have taken the search for new banking partners offshore, while trading platform LedgerX has been forced to find a new bank for a second time, after switching initially from Silvergate to Signature. None of the firms responded to a request for comment.

By virtue of the value they represent to banks, larger crypto businesses are likely to be able to hold on to their existing accounts in the US, says Carter, which means US residents will still have access to crypto exchanges. But smaller firms are “scrambling,” he says. The result is likely to be that some businesses will migrate to countries with more favorable regulatory regimes; some will struggle to raise venture capital, which is contingent on access to banking; and others won’t be started in the first place, says Carter.

With the fall of Silvergate and Signature, the only two banks to offer real-time payments at any hour and on any day, the 24/7 crypto industry will have to get used to operating at a different pace. For traders, this means an inability to exit bets outside of regular banking hours, which is likely to create an additional level of volatility.

Swan Bitcoin’s Klippsten does not buy into the idea that US regulators have initiated a coordinated assault on the crypto industry, driven by “a man behind the curtain pulling the strings.” He’s also more sanguine about the prospects of the companies “orphaned” by Silvergate and Signature finding new banking partners, saying “banks are usually glad to take your money.” 

Klippsten is also sympathetic to regulators’ ambition to defend against fraud in the crypto sector. But the frustration, he says, is that legitimate crypto companies will be collateral damage. 

“Because crypto is so shady and some of the businesses are so poorly run, the whole category is toxic—it’s a pile of dogshit on average,” he says. “So it’s hard to ask a bank with hundreds of thousands of accounts to differentiate between good crypto businesses, run by mature adults, [and bad ones]. We’re stuck being painted with the same brush.”

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