This article is written by: Iris, Liu Honglin
According to a report by Fox News journalist Eleanor Terrett on January 25th, the U.S. Senate Banking Committee announced that a hearing will be held on February 5th (U.S. time) to discuss the phenomenon of ‘de-banking’ of cryptocurrency companies by banks. Prior to this, the U.S. House Oversight and Government Reform Committee had already written to several cryptocurrency company executives requesting explanations on this issue.
In recent years, ‘debanking’ has gradually become a key feature of the crypto industry. From payment interruptions to financing bottlenecks, and then to the transformation of custody services, in the current disconnection between traditional financial institutions and the Web3 industry, crypto companies are also trying to take a ‘break away’ from traditional finance and move towards complete decentralization.
However, is de-banking really an inevitable trend? Or is it just a short-term response to traditional financial regulatory pressures? More importantly, what impact does this trend have on the development prospects of the cryptocurrency industry?
Lawyer Mankun will explore based on the current representative countries and regions’ regulatory policies worldwide in this article.
What is Debanking?
In the cryptocurrency industry, banks, as an important pillar of traditional financial institutions, have long maintained a close relationship with the development of the cryptocurrency industry. For example, in the early days of the cryptocurrency industry, banks ensured the flow of cryptocurrency assets and real currency by providing fiat currency deposit channels. In the process of institutional development, banks also acted as custodians, providing asset security and credit endorsement for cryptocurrency companies. Even in some cutting-edge technology collaborations, banks actively participated in the application experiments of blockchain to empower cryptocurrency technology.
However, in recent years, this cooperative relationship has been undergoing subtle changes. As the regulatory environment continues to tighten, the relationship between banks and the crypto industry is gradually becoming tense.
On the one hand, the anonymity and cross-border mobility of the encryption industry put higher compliance pressure on banks. The requirements of anti-money laundering (AML) and know your customer (KYC) regulations require banks to invest a large amount of resources when cooperating with encryption companies, and these high compliance costs make some banks hesitate. On the other hand, the dramatic fluctuations in the prices of encrypted assets further deepen the concerns of banks about market risks. Traditional financial institutions believe that the high-risk nature of the encryption industry may pose a threat to their stability.
In addition, the continuous changes in the policy environment have exacerbated the cautious attitude of banks. Regulatory agencies in some countries have frequently exerted pressure on banks to restrict or terminate services to crypto companies, while certain opaque projects and fund flows have raised banks’ alertness to potential illegal activities. More importantly, with the rise of stablecoins and decentralized finance (DeFi) technologies, traditional banks also need to face competition pressure from the crypto industry, and this potential market threat has further reduced the willingness of some banks to cooperate with the crypto industry.
Under the combined effect of these factors, some countries, represented by the United States, have seen the phenomenon of ‘debanking’ in the cryptocurrency industry: payment channels are being closed, accounts are being frozen, traditional banks are gradually exiting the cryptocurrency custody market, and some banks even explicitly state that they will no longer provide services to cryptocurrency companies.
Interestingly, the move towards decentralization is not solely driven by banks, as the crypto industry is actively seeking alternative solutions to reduce reliance on traditional banks. In the payment field, stablecoins and on-chain payment protocols are gradually replacing bank accounts and payment networks, becoming the primary payment tools in the crypto industry; in custody services, native crypto companies such as Fireblocks and Anchorage not only provide compliant custody services, but also incorporate technologies like secure multi-party computation (MPC) to fill the gaps in traditional bank custody services; in financing, the rise of DeFi protocols enables crypto companies to directly raise funds through on-chain tools, completely bypassing the restrictions of the banking system.
However, alternative solutions in the cryptocurrency industry cannot completely replace the key role of traditional banks.
The challenge of decentralization
Although the trend towards de-banking seems to provide the cryptocurrency industry with an opportunity to bypass the traditional financial system, Man Kun, a lawyer, believes that this trend also brings significant challenges that cannot be ignored. These challenges may not only hinder the development of the cryptocurrency industry, but also weaken the industry’s influence on the traditional financial market to some extent.
Trust crisis
Banks, as the core institutions in the traditional financial system, cannot be easily replaced by the encryption industry due to their credit endorsement.
Transactions conducted through bank accounts are usually considered legal and compliant, while completely bypassing banks in decentralized operations may undermine public and institutional trust in the cryptocurrency industry. For example, stablecoins, although capable of partially replacing the banking payment network, may face questioning of their value support if the reserve assets behind them are not custodied by banks.
In addition, in the absence of bank involvement, the encryption industry needs to bear higher compliance costs, such as independently establishing anti-money laundering (AML) and know your customer (KYC) systems, and the standardization and credibility of these systems still need to be strengthened.
Asset Security
The experience and security capabilities of traditional banks in the field of asset custody are difficult to match with the current alternative solutions in the crypto industry.
Although some native cryptographic enterprises have provided innovative custody services, these services still face potential threats such as technical vulnerabilities, smart contract risks, and hacker attacks. More importantly, after decentralization, the credibility of custody services may be challenged, especially for traditional institutional investors, the lack of bank-level security may reduce their willingness to invest in cryptographic assets.
Financial Isolation
The de-banking process is gradually decoupling the payment networks of the encryption industry from the traditional financial system. Although this improves the efficiency of on-chain payments, it may also lead to financial island effects.
The internal payment and financing networks in the cryptocurrency industry may not be seamlessly integrated with traditional financial markets, thereby limiting the mainstream application of cryptocurrency assets. For example, if certain large multinational companies cannot connect with cryptocurrency payment networks through bank accounts, their willingness to use cryptocurrency assets as a payment method will also decrease.
Regulatory pressure
The fully de-banked operation may trigger greater regulatory pressure.
In recent years, governments around the world have been continuously strengthening their regulation of the cryptocurrency industry. Debanking may be seen as a strategy for the cryptocurrency industry to evade traditional financial regulation, thus triggering more scrutiny and restrictions. For example, the EU’s MiCA regulation requires stablecoin issuers to store a portion of their reserve assets in banks to ensure value support, while the trend of debanking is directly contradictory to this requirement. Similar policy contradictions may intensify friction between the cryptocurrency industry and regulatory agencies, and even trigger the introduction of more restrictive policies.
Industry fragmentation
The process of debanking is uneven, with large crypto businesses often having more resources to seek alternatives, while small and medium-sized businesses may face greater challenges. For example, large enterprises can establish internal compliance systems and speak directly with regulators, but small and medium-sized enterprises may find themselves in compliance difficulties due to lack of resources. In the long run, this imbalance may lead to further differentiation within the industry, exacerbate the trend of concentration of resources to leading enterprises, and is not conducive to the diversified development of the industry.
Global Banks in Regulatory
In the previous section, lawyer Mankiw mentioned that the EU MiCA proposal on stablecoins requires issuers to comply with strict reserve requirements, storing at least 30% of reserve assets in the form of legal tender in EU-authorized banks to ensure the stablecoin’s value remains pegged to the underlying assets. At the same time, the MiCA proposal also sets out compliance requirements for custodians and crypto service providers, requiring them to fulfill anti-money laundering (AML) and know-your-customer (KYC) obligations. Particularly in the custody sector, MiCA aims to enhance asset security by authorizing custodian banks, to some extent offsetting the trend of de-banking.
This regulatory logic that rebinds banks with the crypto industry is not only present in the EU but also reflected in the regulatory frameworks of other countries and regions such as Singapore and Hong Kong. In Singapore, the Payment Services Act (PSA) requires digital payment token (DPT) service providers, including stablecoin, to obtain a license from the Monetary Authority of Singapore (MAS). This not only imposes requirements on payment services and trading platforms but also emphasizes that stablecoin issuers must collaborate with local banks to ensure the compliance of reserve management and payment clearing.
Similarly, Hong Kong’s regulatory policies are following a similar approach. According to the latest guidance from the Securities and Futures Commission (SFC) of Hong Kong, stablecoin issuers must hold proof of assets from regulated banks or trust companies. In addition, Hong Kong has raised the bar for exchanges and custodians, requiring them to establish effective internal control measures to prevent fund misuse and provide higher security guarantees for market participants. These requirements not only reflect a focus on user protection but also demonstrate the regulatory authorities’ emphasis on the indispensable role of banks in the compliance chain.
It can be seen that, whether in the European Union, Asia, or other regions, the global trend of cryptocurrency regulation does not fully support “debanking”. On the contrary, regulatory authorities in various countries are incorporating banks into the core of the cryptocurrency ecosystem through regulatory design, in order to reduce potential systemic risks while ensuring industry development.
Summary by Manquan
The phenomenon of de-banking reveals the efforts of the cryptocurrency industry to break free from traditional financial constraints, and also reflects the pains of the global financial system in the face of technological change.
The central role of traditional banks in payment clearing, asset custody and credit endorsement is still the foundation of the crypto industry that is difficult to completely replace. Although the crypto industry has shown great potential for technological innovation in the field of payments and financing, its further development is still constrained by a lack of trust, regulatory frictions, and technological risks.
Therefore, complete de-banking is not a realistic path, and the current de-banking seems more like a catalyst for promoting the new balance between the crypto industry and traditional finance, rather than a simple separation. More importantly, this phenomenon also provides an opportunity for global financial system to reflect and adjust. De-banking should not be seen solely as a unilateral experiment of the crypto industry, but as the beginning of traditional finance and emerging technology working together to explore future financial models.
As Mr. Mankiw has always advocated, justice and regulation should not be opposed to technology, but should find a breakthrough point in integration. In the future, only driven by innovation and compliance, de-banking can not stop at differentiation and contradictions, but become a key driving force for building a new financial ecosystem. This is not only a key part of the self-evolution of the crypto industry, but also a historical node in the reshaping of the global financial order.
It is worth celebrating that, as of the writing, the US hearing on Debanking has been successfully held, and the meeting focused on the impact of bank account closures and financial service restrictions on enterprises and individuals. During the session, several witnesses pointed out that regulatory pressures on banks have led to the severance of business relationships between banks and cryptocurrency-related companies, affecting not only the normal operation of the industry but also weakening the US competitiveness in the global digital economy.
At the same time, the Federal Deposit Insurance Corporation (FDIC) released a 790-page document, acknowledging that its past regulatory measures on the crypto industry were too strict, and stating that it will re-evaluate the relevant policies. FDIC acting leader Travis Hill further promised at a hearing to provide banks with clearer regulatory guidance to ensure that they can participate in blockchain and cryptocurrency-related businesses within a legal and compliant framework.
The hearing and the FDIC’s change in attitude release a signal that the US regulatory agencies may loosen their policies towards the crypto industry. However, this does not mean that the traditional financial system will completely open its doors to crypto companies, but rather it is more like a recalibration of the regulation between policy and market demand. The relationship between banks and the crypto industry may be entering a period of relaxation, but the real market changes still depend on the pace and strength of regulatory implementation.
But at least, the first step of integration has been taken.
