Mercury, Brex and Customers Bank are just some of the names being batted around to crypto founders who are now left scrambling to find alternate banking services following the collapse of Silvergate, Silicon Valley Bank (SVB) and Signature — three prominent crypto banking partners.
Even crypto founders with intact banking partnerships are left questioning their relationships after witnessing the rapid demise of SVB, a top banking pick for venture-backed startups and venture investors alike. Trouble started to brew last week when investors spooked by SVB's moves to shore up its balance sheet advised their portfolio firms to pull funds.
By Friday, the bank was closed by regulators. Signature Bank followed two days later. While depositors will be made whole, the closure of both Signature and Silvergate Bank, which also had to wind down operations last week as a result of a bank run, creates serious implications for crypto, said one venture investor at a leading crypto investment firm.
"Banking options in the U.S. are getting thin for projects in the space," they said, adding simply that it's "not good news." That's putting it mildly.
Operation choke point 2.0
That investor is urging portfolio companies to add at least one additional bank into the mix, but finding one might be easier said than done.
Since late last year, U.S. regulators have stepped up regulatory action towards crypto companies, particularly those linked to banking services, whether it be stablecoin issuers such as Paxos or digital asset banks such as Custodia. Venture investor Nic Carter calls this “operation choke point 2.0,” which refers to a coordinated crackdown on crypto through the banking industry.
“A month ago, it was chokepoint — banks discouraged from touching crypto, now it's... decapitation,” said Carter on Twitter. “Every pro-crypto bank has been shuttered.”
George Bousis, co-founder and venture investor at early-stage venture firm Protagonist, remains cautious on recommending banking partners because the environment is changing by the day.
"I wish I had a better answer as far as having a crystal ball to know what would happen at this point, but I don't," he added. "And that is one of my worries and something that does keep me up at night."
What are crypto startups' options?
While openly crypto friendly banks in the U.S. are fading from view, some web3 companies are still managing to find banking partners.
Options include Mercury, Brex and even Wall Street giant JPMorgan Chase, said the unnamed venture investor. JPMorgan declined to comment. Mercury and Brex didn't immediately respond to requests to comment.
“Medium term, we prefer the larger banks [such as] Chase and co.,” they said. “But at the moment, it’s advisable to have any redundancy really, so folks like Brex or Mercury who can onboard quickly are great options.”
Multi-sig startup Den has always used Mercury as a banking partner, combined with the use of on-chain assets.
“It was a pretty smooth process for us,” said Jonah Erlich, co-founder of Den, about the onboarding process to Mercury. After the events of the weekend, Den is looking to increase the percentage of its treasury held on-chain, heeding advice from venture investors. “We are staying with Mercury but are also exploring opening accounts at similar fintech providers utilizing sweep accounts and GSIBs [global systemically important banks],” Erlich said.
Mercury is a fintech startup that works 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 to the standard $250,000 threshold. This is thanks to the use of sweep networks, which enable customer deposits to be spread across a variety of banks.
“We (@mercury) have already onboarded 2x more customers today than we do on a normal weekday!” said Immad Akhund, CEO and founder of Mercury on Twitter over the weekend.
Another option in the U.S. is Customers Bank, but many of these banking players don't have the same on and off ramps that Signature and Silvergate offered, said Michael Safai, co-founder and partner at trading firm Dexterity Capital.
Regional and community banks
Another challenge is that bulge bracket banks and even regional banks in the U.S. do not offer support for holding tokens or crypto assets.
Mercury itself is privately held, but its partner Choice Financial Group trades publicly. Shares of many public banks, both regional and large, are also trading deep in the red following recent events — despite reassurances from U.S. President Joe Biden on Monday.
Neil Zhang, founder of prediction market startup Frontrunner, has had trouble securing banking partnerships due the double whammy of operating a web3 firm that focuses on gambling. His startup currently relies on two regional banks, MVB and Western Alliance. Neither bank immediately responded to requests for comment on its offerings.
“It took us quite a while to find these two banks that were willing to take us and while they aren't the newest or highest-tech banks out there, we have generally been happy with them since we switched from Brex at the start of this year,” Zhang said.
Despite both banks taking a significant hit in the public markets, Zhang isn’t looking to move away from either bank but is always looking to diversify further, he added.
Many crypto startups are storing at least some assets on-chain. Frontrunner mostly holds funds in fiat but any crypto assets are stored in a multi-sig Gnosis Safe wallet, Zhang said. The startup hasn’t received any guidance from investors that would suggest it should change that approach, he added.
Web3 corporate card startup Multis also hasn’t received any advice from investors other than to distribute funds into multiple banks, said Thibaut Sahaghian, Multis’ CEO. It's currently also in the process of onboarding many web3 customers as it operates as a viable alternative to Mercury offering checking accounts and corporate cards, he added.
“As of today, Multis is in a strong financial position. We were fortunate to only have a limited exposure to SVB, and we're still well-capitalized in USD, EUR, USDC, DAI, ETH and BTC across multiple accounts, including ours,” Sahaghian said.
The startup currently banks with Synapse, which partners with Lineage Bank, and doesn't intend to switch providers. It is working to further diversify its financial services providers. Synapse and Lineage Bank didn't immediately respond to a request for comment on its offerings.
“We can't be immune to moral hazard risk, and as such need to diversify into various assets to keep businesses running,” he said. “USDC and stables is only a partial answer as redemption is impacted by the current crisis, through fiat-dependant centralized issuance. But we're going in the right direction.”
Across the pond
Non-U.S. based startups have the advantage of tapping players such as Sygnum and Seba Bank — Swiss banks that are also allowed to hold crypto assets.
Martin Burgherr, chief clients officer at Sygnum, told The Block that the bank was seeing an influx in inquiries following the fallout from Silvergate, but that they could not completely fill the void due to a strategic decision not serve U.S. customers.
"Crypto companies looking for new banks may have to look offshore for the time being," Dexterity Capital's Safai said. "There are a handful of banks in the Bahamas, as well as a few options in Europe that are crypto friendly and trustworthy."
Update: Story updated with further comment from Thibaut Sahaghian.
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