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In the US, regulators have clarified that digital assets threaten the banking sector with their recent comments, recommendations, and policy announcements.
That comes after three of the most "crypto-friendly" US banks, Silvergate, Silicon Valley Bank, and Signature, all went down in a week in March, and the crypto community watched in horror.
Although the failures were at least in part due to poor risk management, the close ties between these institutions and the crypto industry have had far-reaching consequences for crypto banking.
Ashrith Rao
Therefore, most big financial institutions and banks have had to stay out of the market.
Now, what does that mean for the crypto industry and the banking sector?
Firms have looked at partnerships outside the US; big banks have tapped the brakes on cryptos. Cryptocurrency companies have found it difficult to establish new banking links after the collapse of Silvergate, Silicon Valley Bank, and Signature.
Many large banks are reluctant to work with customers they consider "higher risk," such as bitcoin exchanges and money services companies, contributing to the concentration of risk in these institutions.
The existence of such a challenge has been established.
Some platforms for trading cryptocurrencies were suddenly removed as managed assets at major banks. And as banks kept rejecting or dropping crypto companies as clients, the firms could not pay employees or continue operations.
This reluctance has risen from concerns about the safety of providing services to consumers who trade in cryptocurrencies.
Regulatory Trouble
In addition, tensions between the crypto industry and US authorities like the Securities and Exchange Commission (SEC) have reached a fever pitch.
The crypto industry has relentlessly called for the SEC to be consistent.
However, due to enforcement actions, application decisions, and policy choices, the SEC has constructed implied standards that some cryptocurrency enterprises have found inadequate or confusing.
The crypto industry is in flux since neither the SEC nor the crypto businesses who ignore its implied restrictions can agree on who is in the "right" position.
A ruling favouring Ripples Lab has eased the concerns for the time being.
Blockhead
New Player Emerges
In the meantime, smaller banks have emerged as the top partners for crypto firms. Despite initial reluctance, a small bank in Pennsylvania has become a major player in the cryptocurrency sector.
According to a Bloomberg report citing persons familiar with the matter, Customers Bancorp Partners has partnerships with various digital asset companies, including major exchanges, market makers, and stablecoin issuers.
As a result of the demise of crypto-friendly lenders Silvergate Capital and Signature Bank, the West Reading company's primary subsidiary, Customers Bank, gained new clients.
Customers Bank was a rare option for crypto companies dealing with US dollars. Almost two years ago, when Bitcoin was at its peak, and investors were flocking to the market, the 81st largest bank in the United States by assets was at the forefront of a sector that has since been hit hard by blowups, scrutinised by regulators, and avoided by traditional lenders.
At that time, Customers Bank CEO Sam Sidhu said the institution would begin offering Bitcoin services.
The bank has lately imposed a cap on deposits related to cryptocurrencies. Sidhu also claims the assets are just a small component of a wider plan to expand the bank's payments operation.
For now, though, big banks have stayed on the sidelines and until there is regulatory clarity, the scenario is unlikely to change anytime soon.
