Regulatory pressure shifts banks’ stance on crypto, WSJ reports

Banks are cutting ties with crypto firms amid fears of regulatory crackdown. Regulators threaten to separate digital assets from the traditional financial system, The Wall Street Journal reports.

Regulators have expressed concerns about such relationships in the wake of the collapse of FTX.

According to the publication’s sources, against the backdrop of a campaign by SEC against major players in the industry, the banking sector has contemplated restricting business with clients who may come under the Commission’s scrutiny.

Banks have scrutinised any exposure to the crypto sector, no matter how small.

Several smaller banks that were deeply embedded in the industry are trimming their footprints or severing ties altogether, WSJ reports. Those institutions that “kept their distance” have begun closing accounts and denying clients with potential ties to crypto firms.

Thus, Metropolitan Commercial Bank in New York announced the closure of its digital-asset-focused business, citing significant changes in the regulatory environment. Signature Bank cut ties with Binance’s international business.

The publication noted that crypto firms still largely rely on banks to access the financial system for dollar- and euro-denominated operations.

“If you don’t have a bank account, it is very difficult to do business,” said Signature Bank CEO Scott Shay.

Since 2020, the Office of the Comptroller of the Currency (OCC) has allowed banks to provide custody services for cryptocurrency, hold collateral for stablecoins and issue them.

The situation changed after the FTX collapse. In January 2023, three major sector regulators warned banks about concerns regarding their ties to crypto firms on safety and soundness grounds, the publication notes.

“Banks, if you are going to work with the crypto business, we will be watching you closely. After all, you will have to ask yourself whether it is worth worsening the situation,” commented Thomas Vartanyan, CEO of the Financial Technology and Cybersecurity Center.

The publication explained that banks have concluded that clients from the industry “are not worth the hassle” due to regulators, and are cutting them off.

Signature — the best-known bank to sever ties with the industry. In early 2022, 27% of its deposits totaling $109 billion came from crypto firms.

By the end of 2022, the bank announced plans to reduce this share to 15% and cap inflows from any single crypto client.

WSJ noted that some banks have not changed their strategy.

Silvergate has no other sources of income unlike Signature. The company has lost most of its crypto deposits following a bank run in the last quarter. The organisation is trimming jobs and business in an effort to cut costs. Silvergate said it remains committed to serving crypto-industry companies.

Earlier Paxos denied rumors of a potential withdrawal of its application for a full nationwide-trust-bank charter from the OCC.

On February 10, it emerged that the NYDFS initiated an investigation into the company. Subsequently the regulator ordered Paxos to stop issuing BUSD. The SEC also said it was prepared to sue the latter.

The Department of Justice’s fraud unit is investigating deals between Silvergate and the cryptocurrency exchange FTX and the related hedge fund Alameda Research.

Senators Elizabeth Warren, John Kennedy and Roger Marshall asked Silvergate CEO Alan Lane to provide detailed information about the bank’s ties to the exchange run by Sam Bankman-Fried and the trading platform.

In late 2022 the bank was named in a class-action lawsuit over its alleged role in transferring users’ deposits from FTX to Alameda Research accounts.