Private Regulations Are Squeezing Crypto

Overview

There have been many public repercussions in the crypto industry stemming from fraud, bankruptcies, unregistered securities offerings, etc. It’s all over the news & hard to miss. But, there has been minimal government enforcement action (aside from a few pay-to-play fines). Ex: Coinbase paid $50m to NYDFS for inadequate money laundering protections. Rather than taking a public approach to regulation, the government has been working behind the scenes with US banks to impose ‘silent’ restrictions on crypto.

US Banks

Metropolitan Commercial Bank ($MCB) This Manhattan bank is one of the smallest on our list, with <$1.5b in crypto deposits. However, they were one of the first to offer banking services to crypto businesses - making them an easy target for private regulation. During last week’s earnings call, MCB announced they will no longer support crypto customers and will be terminating all existing relationships. Metropolitan Commercial Bank noted “material changes in the regulatory environment” as one of their reasons to exit the space and also reserved $35m towards a settlement in an ongoing investigation from the Department of Financial Services. Clearly, Metropolitan Commercial Bank is receiving heat from regulators for supporting crypto customers. Voyager, a now-bankrupt crypto lender, was a known client of MCB; which caused both the FDIC & SEC to make investigate the relationship. Signature Bank ($SBNY) Signature Bank is arguably the most important pillar in the crypto market today as they hold majority of US crypto deposits (~$20b) and operate the Signet blockchain. Signet allows crypto exchanges, OTC desks, hedge funds, miners, etc. to transact instantly 24/7/365 through the use of Signet tokens. Clients of the bank are also able to mint/redeem USDC on the platform. Signet processes upwards of $1b per day for the crypto industry, sometimes doing more volume than Coinbase exchange. But, Signature is also regulated as a New York bank. On their recent earnings call, SBNY announced they will be restricting crypto-related deposits to 15% of overall bank deposits. Capital requirements like these are often recommended by government officials. Additionally, Binance released the following statement: “One of our fiat banking partners, Signature Bank, has advised that it will no longer support any of its crypto exchange customers with buying and selling amounts of less than $100k as of February 1, 2023.” To clarify, Signature will no longer process wire transfers for retail traders under the amount of $100k. Users who deposit/withdraw from crypto exchanges via ACH may still do so, and institutional investors are still able to wire any amount they’d like. But, this may affect other exchanges if they rely on Signature for customer deposits/withdrawals via wire transfer.

Above is a list of all crypto companies who have chosen to publicly disclose their banking relationship with Signature that may be affected. A capital concentration restriction on crypto bank deposits & transaction minimums imposed by Signature is also likely a result of regulatory heat. As the bank had no concentration or transaction issues prior to the recent industry collapse. Silvergate Bank ($SI) If you don’t know about Silvergate, we wrote about their recent lawsuit, money-laundering subpoenas, executive conflicts of interest, and $5.2b debt raise needed to cover crypto customer withdrawals - they were operating insolvent! You may read the article here. Again, no public enforcement actions have been taken against Silvergate. But it’s hard to believe that government agencies are letting them operate under full control since the bank almost failed. What is interesting though, is that CEO Alan Lane mentioned the bank maintains a close relationship with regulators. On The Pomp Podcast Lane stated the bank originally sat down with regulators to teach them about Bitcoin and explain how they would monitor crypto transactions from an AML/KYC perspective.

Closing

The US government has not yet established clear regulations when it comes to banking, exchanges, security tokens, or really anything related to crypto (besides individual tax reporting). While bankruptcy proceedings (Celsius, FTX, Voyager, Genesis, 3AC, BlockFi, etc.) will take years to settle, it’s clear that regulatory agencies are not waiting for the government to draft new laws. As a temporary workaround, they’re targeting the banks in order to enforce private workarounds in the ways we have mentioned. In turn, crypto users should be aware of the platforms they interact with and the banking rails that support their transactions as the restrictions are likely to continue affecting the industry. Breakdown Report is interested in hearing your thoughts on this topic & whether or not our audience follows this piece of crypto markets. Please feel free to DM or ping RyOnTheStreet#9129 in the Radar Discord or tweet at us! Always happy to have a conversation with our readers.