(Bloomberg) -- Crypto startups are left searching for alternative banking solutions after the collapse of three US banks with ties to the digital-asset industry and its backers.
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Years of regulatory scrutiny have effectively blocked most crypto firms from traditional banks. So the failure of Silicon Valley Bank has thrown many groups’ day-to-day mechanics like payroll and bill processing into flux, while the shuttering of Silvergate Capital Corp. and Signature Bank has closed vital on-off ramps between crypto and traditional currencies.
“Everybody’s in limbo,” said Dan Matuszewski, co-founder at crypto investment fund CMS Holdings.
Now crypto startups are weighing their options — many of which are likely to push the industry further into the fringes of the financial sector — including the creation of a community-run credit union, launching a blockchain-based solution or even utilizing crypto credit cards.
To be sure, venture capital firms are helping portfolio companies find new banking partners. Cross River Bank has emerged as a preferred option after it was reported Circle Internet Financial Ltd. was shifting business there from SVB, where it had $3.3 billion deposited.
But, given most banks’ reluctance to partner, others are looking to take matters into their own hands, said David Pakman, managing partner at crypto VC firm Coinfund LLC. Chats between VCs, founders and others in the crypto community on platforms like Telegram boil down to a simple, urgent message, he said: “We must build an alternative.”
One option on deck is a community-run credit union that could receive deposits and make loans. Proponents even argue that if it were a nonprofit, deposits would be less at risk since it wouldn’t be investing like a traditional bank.
Another alternative would be to lean further into blockchain technology. If a crypto custody firm were to link with a payroll provider, for example, there’d be a way to at least pay employees by converting stablecoins to dollars.
“We know quality custody exists in crypto,” Pakman said. But it could be a stretch, given the amount of distress caused by USD Coin’s recent de-pegging after Circle disclosed its exposure to SVB, he said.
A third option involves the use of corporate credit cards that allow holders to pay off balances with crypto. Pakman said VCs have also been meeting with companies that previously offered credit cards with crypto rewards to see if an option like that could be made available.
But any solution is likely to face the challenge of finding funds. Many of the VC firms that helped pour a record $31 billion into blockchain startups last year were also SVB depositors who are likely to pull back on speculative investments. Plus, crypto VC funding had already declined 75% in fourth quarter over the previous year, according to analytics firm PitchBook, after crypto’s multiple blowups last year.
SVB wasn’t “just another mom-and-pop bank around the corner,” but a linchpin in venture investing, said Edith Yeung, general partner at Race Capital. “I’m sure there were deals made last week that are now not going to happen.”
This week US regulators assured SVB and Signature Bank depositors they would have access to funds. But crypto firms still have many banking hurdles ahead.
“It’s a good week for people getting their money back,” said Haseeb Qureshi, managing partner at VC firm Dragonfly. “It’s a bad week for crypto banking.”
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