Fewer Banks Are Accepting Cryptocurrency. Those That Do May Face Higher Risks.

There is a chance that the next cryptocurrency bank may be preparing for a crisis of its own because fewer institutions are prepared to take on business from the industry. Crypto firms had not much to do with the recent banking instability.

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It is already evident that New York Community Bancorp NYCB +33.80% (ticker: NYCB), which the Federal Deposit Insurance Corp. stated on Sunday would take over the majority of the accounts originally belonging to Signature Bank, will not be given the designation of crypto bank (SBNY).

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Nevertheless, the FDIC's notification specifically stated that NYCB subsidiary Flagstar Bank will not accept the $4 billion in deposits relating to Signature's digital banking sector, which includes crypto. Signature was one of the few institutions accepting accounts from the crypto industry.

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Instead, the FDIC will return such deposits to clients, who will likely need to find a new bank that will accept them.

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It is simpler to say than to do. As Silvergate Capital (SI) announced it will cease operations, cryptocurrency lost another alternative. Moreover, SVB Financial Group (SIVB), whose Silicon Valley Bank folded this month, was recognized primarily for catering to start-ups and venture capital firms, albeit it also had some well-known cryptocurrency clients.

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Presently, the number of depositories still prepared to accept business from crypto businesses is shrinking. According to a research note from Needham analyst John Todaro, as of this month, those included well-known companies like JPMorgan Chase JPM +0.53% (JPM), Bank of New York Mellon BK +1.27% (BK), and Customers Bancorp CUBI +2.83%, as well as smaller organizations like Cross River Bank and Customers Bancorp (CUBI).

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Bank regulators have issued guidelines in recent months that have made it far more challenging for some cryptocurrency start-ups to even open checking accounts. In their instructions, the authorities note that banks are not prohibited from offering their services to any legitimate industry, claiming that their goal is not to "de-bank" the sector.

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Yet, when banks close or decide not to conduct business in cryptocurrencies, the number of businesses that are still prepared to take on digital asset corporations increases. According to Rohan Grey, a law professor at Willamette University, that is a prescription for more failures.

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Grey, who has criticized a large portion of the crypto business, warned that whoever is left standing will be in the most difficult position.

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The concentration risk is comparable to that faced by community banks, whose futures are dependent on the health of their local communities' economies. The problem with cryptocurrency is that because it experiences such swift boom and bust cycles, any bank that invests the sector a significant portion of its deposits would surely experience a bear market.

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In an opinion piece published on Saturday, general counsel for trade association Crypto Council for Innovation Linda Jeng said that in order to lessen concentration risk, authorities should encourage banks to serve various industries, including crypto.

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Several industry supporters are already concerned that authorities would blame them in part for the unrest in the banking industry as a whole. Fair or not, regulators seem prepared to use the crisis to broaden their campaign against the industry, according to analysts at Washington, D.C.-based Beacon Policy Advisors in a research note published on Monday.

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The analysts concluded that it is unlikely to make a substantial difference whether or not the current crisis was sparked by the digital asset markets. "Biden's regulators will view this as another more reason to be cautious in their approach toward cryptocurrencies given the volatility of the conventional banks that they are responsible with preserving."

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Banks will find it increasingly difficult to take a risk on behalf of cryptocurrency companies.

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