The crypto industry needs banking; it needs it badly and always has. Without a banking partner, crypto companies cannot accept dollar deposits in return for services or in exchange for tokens, nor can they pay their employees or vendors. That means the quest to build a parallel financial system free of intermediaries is dependent, inconveniently, on an accord with those same intermediaries—the banks.
Wall Street has often been reluctant to work with crypto companies, so many in the industry came to rely on just two US banks—Silvergate and Signature—which made themselves invaluable to crypto clients by offering real-time payments outside of traditional banking hours. Over the past week, both banks have closed, Silvergate because of overexposure to the ailing crypto sector and Signature due to a liquidity crisis triggered by a sudden flood of withdrawals. That has left many crypto businesses—particularly smaller ones—back where they began: unbanked and with few alternatives at hand.
“Overwhelmingly, banking is the challenge for crypto companies,” says William Quigley, cofounder of stablecoin issuer Tether. “A lot of people in crypto are denied access to banking services. It’s a real problem.”
When the crypto space began to grow in the early 2010s, mainstream banks were often hesitant to work with a sector they saw as inherently risky. But as the industry began to move closer to the mainstream over the past few years, Wall Street’s level of comfort grew. Big banks such as JPMorgan and BNY Mellon started banking crypto exchanges and letting their clients store and trade coins. Regulators kept an eye on the sector, but besides a few “policy sprints,” they did little.
Then in 2022, crypto collapsed in spectacular fashion. In May, the failure of the Terra-Luna stablecoin wiped out an estimated $60 billion, prompting a chain reaction that later took down crypto lender Celsius, hedge fund Three Arrows Capitals, and others. This was followed in November by the implosion of crypto exchange FTX, whose founder has since been charged with 12 criminal offenses, including bank fraud, wire fraud, and money laundering.
The fallout from the destruction of major pieces of the crypto ecosystem didn’t really spread into the mainstream financial sector, but regulators felt compelled to make sure it stayed that way. In a joint statement on January 3, the Federal Reserve, Federal Deposit Insurance Corporation (FDIC), and Office of the Comptroller of the Currency (OCC), the agencies responsible for the stability of the US banking system, claimed that crypto represents a “significant risk” for banks. “It is important that risks related to the crypto-asset sector that cannot be mitigated or controlled do not migrate to the banking system,” the agencies wrote, although they also made it clear that US banks are “neither prohibited nor discouraged” from servicing crypto businesses.
Since the start of the year, statements by the regulators and White House have further warned banks to limit their exposure to crypto. In late January, the Fed also announced that it had denied Custodia, a state-chartered bank that offers cryptocurrency custody services, applications to join the Federal Reserve System and open a master account, which would have made it possible for the firm to compete on a level footing with large national banks.
Almost all of the household names in crypto—and many smaller ones—gravitated to the two institutions that remained friendly to crypto: Silvergate and Signature.
Silvergate fell first. The bank had been struggling since the collapse of FTX and its sister company Alameda Research—both of which were also clients—which led customers to withdraw billions of dollars. On March 8, the bank announced it was being wound down. The US Department of Justice is reportedly conducting an investigation into Silvergate over services provided to FTX and Alameda.
The situation at Signature was different. The bank had been attempting since December to diversify its customer base to avoid the same concentration risk that afflicted Silvergate. But it appears that its reputation as a crypto bank, combined with panic in the wake of the failure of Silicon Valley Bank (SVB), was enough to drive another fatal run on deposits, leading the FDIC to take possession of the bank on March 12.
In an interview with Bloomberg on Sunday, Signature board member Barney Frank, the former congressman responsible for US banking reforms in the wake of the 2008 financial crisis, said that the bank could have survived, but that regulators “wanted to send a message to get people away from crypto.”
The US Treasury did not respond to a request for comment. The Federal Reserve and FDIC declined to comment on the record. Stephanie Collins, media relations manager at the OCC, noted that the agency does not have oversight over Silvergate or Signature but did not address questions around coordination between US banking regulators. But in a statement provided to Reuters, the New York State Department of Financial Services, which handed Signature over to the FDIC, said “the decisions made over the weekend had nothing to do with crypto.”
However, the idea that regulators have it in for crypto carries weight in some parts of the industry. Even before Silvergate and Signature were shut down, members of the crypto community—including the CEO of US crypto exchange Kraken—were crying conspiracy and calling it “Operation Choke Point 2.0,” or a coordinated attempt to cut crypto off from the banking system.
The term, coined by Nic Carter, general partner at VC firm Castle Island Ventures, refers to a program launched by the Obama administration, under which US officials were said to have pressured banks into severing ties with disfavored industries like pornography and payday lending.
Proponents of the Choke Point 2.0 theory say these moves are a renewed attempt to regulate by stealth—to use influence over the banking sector to create de facto policy without requiring the approval of Congress. “For now, most banks are petrified of serving crypto, so the policy has been a success without requiring a ban,” Carter says. “The objective is to do as much as possible without requiring new laws to be passed.”
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.
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