Source: The Block
Compiled by: Mary Liu, BitpushNews
After the sudden collapse of three well-known crypto banking partners, Silvergate Bank, Silicon Valley Bank (SVB) and Signature Bank, crypto startups are looking to expand new banking services, including alternative banking services such as Mercury, Brex and Customers Bank. (Related reading: "Three crypto-friendly banks have collapsed, what crypto-friendly banks are left in the United States?")
A venture capitalist at a leading cryptocurrency investment firm said that while depositors did not lose much, the closure of Signature and Silvergate Bank (which also had to cease operations last week due to a bank run) has a serious impact on the crypto industry. "For projects in the space, the U.S. has fewer and fewer banking options, which is a euphemism and not good news," they said.
Operational Bottleneck 2.0
The investor urged the portfolio company to add at least one more bank, but finding one was easier said than done.
Since late last year, U.S. regulators have stepped up their regulatory actions against crypto companies, especially those tied to banking services, whether stablecoin issuers like Paxos or digital asset banks like Custodia. Venture capitalist Nic Carter calls this “Operational Bottlenecks 2.0,” referring to the crackdown on cryptocurrencies through the banking industry.
Carter said in a tweet: “A month ago, this was a bottleneck - banks were discouraging exposure to crypto, now it’s almost like... beheading, every bank that supported crypto has been closed.”
George Bousis, co-founder and venture capitalist at early-stage venture capital firm Protagonist, remains cautious in recommending bank partners because the environment is changing every day.
“I wish I had a better answer, like a crystal ball to know what’s going to happen at this point, but I don’t, and that’s one of my concerns and something that keeps me up at night,” he told The Block.
What are the options for crypto startups?
While overtly crypto-friendly banks in the U.S. are fading from view, some web3 companies are still trying to find banking partners.
The unnamed venture capitalist said options include Mercury, Brex and even Wall Street giant JPMorgan Chase. JPMorgan declined to comment. Mercury and Brex did not immediately respond to requests for comment.
The anonymous investor said: “In the medium term, we prefer a large bank [such as] Chase, but at present, it does suggest that there is any plan B or C, so platforms like Brex or Mercury that can quickly cooperate are good choices.”
Multi-signature startup Den has been using Mercury as a banking partner in conjunction with the use of on-chain assets.
Den co-founder Jonah Erlich spoke about the Mercury partnership process and said that after the weekend incident, Den is listening to the advice of venture investors and hopes to increase the percentage of funds held on the chain. He said: "It has been a very smooth process for us. We will stay with Mercury, but we are also exploring the use of clearing accounts and GSIBs [global systemically important banks] to open accounts on similar fintech platforms."
Mercury, a fintech startup, has partnered with two Federal Deposit Insurance Corp.-insured banks, Evolve Bank and Trust and Choice Financial Group. Its checking and savings deposits can now be FDIC-insured up to $3 million, compared with the standard $250,000 threshold. That’s thanks to the use of sweep networks, which enable customer deposits to be spread across banks.
“We have twice as many new customers joining today as we do on a normal weekday!” Immad Akhund, CEO and founder of Mercury, said over the weekend.
Another option in the U.S. is Customers Bank, but many of those don’t have the same access to funds that Signature and Silvergate offer, said Michael Safai, co-founder and partner at trading firm Dexterity Capital.
Regional and community banks
Another challenge is that large banks and even regional banks in the U.S. do not support holding tokens or crypto assets.
Mercury itself is privately held, but its partner Choice Financial Group is publicly traded. Shares of many regional and large public banks also fell sharply following recent events, despite assurances from U.S. President Joe Biden on Monday.
Neil Zhang, founder of prediction market startup Frontrunner, has had trouble securing banking partnerships due to the double whammy of running a web3 company focused on online betting. His startup currently relies on two regional banks, MVB and Western Alliance. Neither bank immediately responded to requests for comment on their products.
“It took us a long time to find these two banks that were willing to take us on, and while they aren’t the newest or most tech-savvy banks, we’ve been happy with their service since switching from Brex earlier this year,” Zhang said.
He added that while both banks have taken major hits in the public markets, the company has no plans to abandon either bank and has been looking to further diversify.
On-chain assets
Many crypto startups store at least some assets on-chain. Frontrunner holds mostly fiat funds, but crypto assets are stored in multi-signature Gnosis Safe wallets, Zhang said. He added that the startup has not received any guidance from investors suggesting it change this approach.
Thibaut Sahaghian, CEO of Web3 corporate card startup Multis, said Multis also did not receive any advice from investors and simply distributed funds among multiple banks. He added that it is currently also attracting many web3 customers because it is a viable alternative to Mercury in providing checking accounts and corporate cards.
“As of now, Multis is in a strong financial position. We are fortunate to have limited exposure to SVB, and we remain well funded in USD, EUR, USDC, DAI, ETH, and BTC across multiple accounts, including ours,” Sahaghian said.
The startup currently uses Synapse, which is partnered with Lineage Bank, for banking, and has no plans to switch vendors. It is working to further diversify its financial services providers. Synapse and Lineage Bank did not immediately respond to requests for comment on their products.
He said: “We cannot avoid moral hazard, so we need to diversify into various assets to maintain business operations. USDC and stablecoins are only part of the answer because redemptions are affected by the current crisis and rely on centralized issuance of fiat currencies. But we are moving in the right direction.”
Looking beyond the United States
Startups that are not based in the United States have the advantage of leveraging players such as Sygnum and Seba Bank — Swiss banks that are also allowed to hold crypto assets.
Martin Burgherr, chief client officer at Sygnum, told The Block that the bank received a large number of inquiries following the Silvergate fallout, but they were unable to fully fill the gap due to the company’s strategic decision not to serve US clients.
“Crypto companies looking for a new bank may have to look overseas for the time being,” said Safai, co-founder of Dexterity Capital. “There are several banks in the Bahamas, and there are also some crypto-friendly and trustworthy options in Europe.”