Crypto startups are looking to expand into new banking after the sudden collapse of three prominent crypto banking partners, Silvergate Bank, Silicon Valley Bank (SVB) and Signature Bank, which includes alternative banking services such as Mercury, Brex and Customers Bank.

Venture capitalists at a leading cryptocurrency investment firm said that while depositors had little to lose, the closures of Signature and Silvergate Bank - which also had to cease operations last week due to a bank run - have had a serious impact on the crypto sector. It's a euphemism for the fact that there are fewer and fewer banking options in the U.S. for projects in the space, which isn't really good news," they said.

Operational bottleneck 2.0

The investor urged the portfolio company to add at least one more bank, but finding one is easier said than done.

Since the end of last year, U.S. regulators have stepped up their regulatory actions against crypto companies, especially those associated with banking services, whether it's a stablecoin issuer like Paxos or a digital asset bank like Custodia. Venture capitalist Nic Carter has dubbed this "Operational Bottleneck 2.0," referring to the crackdown on cryptocurrencies through the banking sector.

Carter said in a tweet, "A month ago it was a bottleneck - banks discouraged exposure to cryptocurrencies, now it's almost certainly ...... decimated, and every bank that supports cryptocurrencies has closed."

George Bousis, co-founder and venture capitalist at early-stage venture capital firm Protagonist, remains cautious in recommending banking partners, as the landscape changes daily.

I wish I had a better answer, like having 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 publicly cryptocurrency-friendly banks in the U.S. are fading from view, some web3 companies are still trying to find banking partners.

Options include Mercury, Brex and even Wall Street giant JPMorgan Chase, said the venture capitalist, who asked not to be named. JPMorgan declined to comment, and Mercury and Brex did not immediately respond to requests for comment.

In the medium term, we prefer the big banks [such as] Chase, but at this point, it does suggest there is any plan B or C, so a platform like Brex or Mercury that can work together quickly is a good option," the anonymous investor said.

Den, a multi-signature startup, has been using Mercury as a banking partner in conjunction with on-chain assets.

Speaking about the Mercury partnership process, Den co-founder Jonah Erlich said Den is taking advice from venture capitalists looking to increase the percentage of funds it holds on the chain following the weekend's breakout. It's been a very smooth process for us and we're staying with Mercury, but also exploring opening accounts on similar fintech platforms using clearing accounts and GSIBs [global systemically important banks]," he said.

Mercury is a fintech startup that works with two FDIC-insured banks, Evolve Bank and Trust and Choice Financial Group. Its checking and savings deposits can now be insured by the FDIC for up to $3 million, compared to the standard $250,000 threshold. This is thanks to the use of sweep networks, which allow customer deposits to be distributed across banks.

We had twice as many new customer additions today as we do on a normal business day," said Immad Akhund, CEO and founder of Mercury, over the weekend.

Another option in the U.S. is Customers Bank, but many of these bankers do not have the same access to deposits that Signature and Silvergate offer, said Michael Safai, co-founder and partner at Dexterity Capital, a trading firm.

Regional and community banks

Another challenge is that none of the large U.S. banks or even regional banks support holding tokens or crypto assets.

Mercury itself is privately held, but its partner, Choice Financial Group, trades it publicly. Despite U.S. President Joe Biden's assurances on Monday, the stocks of many regional and large public banks have also fallen severely in the wake of recent events.

Neil Zhang, founder of prediction market startup Frontrunner, has had trouble securing bank partnerships due to the double whammy of running a web3 company that focuses on online betting. His startup now relies on two regional banks, MVB and Western Alliance, neither of which immediately responded to a request for comment on its product.

It took us a long time to find two banks that would take us on, and while they're not the newest or most technically advanced, we've been happy with their service since switching from Brex earlier this year," Zhang said.

He added that the company does not intend to abandon either bank, but has been looking to diversify further, despite the fact that both banks have taken significant hits in the open market.

Assets on the Chain

Many crypto startups store at least some assets on the chain, Zhang said, adding that Frontrunner primarily holds legal funds, but crypto assets are stored in the multi-signed Gnosis Safe wallet. The startup hasn't received any guidance from investors who suggested it change that approach, he added.

Thibaut Sahaghian, CEO of Multis, a Web3 company card startup, said Multis has also not received any advice from investors and is simply allocating funds to multiple banks. He added that it is still attracting many web3 customers because it is a viable alternative to Mercury's offering of checking accounts and corporate cards.

As of now, Multis is in a good financial position," Sahaghian said. We are fortunate to have limited exposure to SVB and we still have sufficient funds in multiple accounts (including ours) in USD, EUR, USDC, DAI, ETH and BTC," said Sahaghian.

The startup currently uses Synapse, which works with Lineage Bank, for banking purposes and does not plan to change providers. Synapse and Lineage Bank did not immediately respond to a request for comment on their products.

We are not immune to moral hazard and therefore need to diversify into various assets to keep the business running, and USDC and stablecoins are only part of the answer, as redemptions have been affected by the current crisis, by relying on centralized issuance of fiat currencies," he said. But we are moving in the right direction."

Eyes turn outside the U.S.

Startups not based in the U.S. have the advantage of taking advantage of players like Sygnum and Seba Bank - Swiss banks that are also allowed to hold crypto assets.

Sygnum Chief Client Officer Martin Burgherr told The Block that the bank received a large number of inquiries following the impact of Silvergate, but they were unable to fully fill the void due to the company's strategic decision not to serve U.S. clients.

Crypto companies looking for new banks 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 some cryptocurrency-friendly and trustworthy options in Europe." Translated with www.DeepL.com/Translator (free version)

Crypto startups are looking to expand into new banking after the sudden collapse of three prominent crypto banking partners, Silvergate Bank, Silicon Valley Bank (SVB) and Signature Bank, which includes alternative banking services such as Mercury, Brex and Customers Bank.

Venture capitalists at a leading cryptocurrency investment firm said that while depositors had little to lose, the closures of Signature and Silvergate Bank - which also had to cease operations last week due to a bank run - have had a serious impact on the crypto sector. It's a euphemism for the fact that there are fewer and fewer banking options in the U.S. for projects in the space, which isn't really good news," they said.

Operational bottleneck 2.0

The investor urged the portfolio company to add at least one more bank, but finding one is easier said than done.

Since the end of last year, U.S. regulators have stepped up their regulatory actions against crypto companies, especially those associated with banking services, whether it's a stablecoin issuer like Paxos or a digital asset bank like Custodia. Venture capitalist Nic Carter has dubbed this "Operational Bottleneck 2.0," referring to the crackdown on cryptocurrencies through the banking sector.

Carter said in a tweet, "A month ago it was a bottleneck - banks discouraged exposure to cryptocurrencies, now it's almost certainly ...... decimated, and every bank that supports cryptocurrencies has closed."

George Bousis, co-founder and venture capitalist at early-stage venture capital firm Protagonist, remains cautious in recommending banking partners, as the landscape changes daily.

I wish I had a better answer, like having 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 publicly cryptocurrency-friendly banks in the U.S. are fading from view, some web3 companies are still trying to find banking partners.

Options include Mercury, Brex and even Wall Street giant JPMorgan Chase, said the venture capitalist, who asked not to be named. JPMorgan declined to comment, and Mercury and Brex did not immediately respond to requests for comment.

In the medium term, we prefer the big banks [such as] Chase, but at this point, it does suggest there is any plan B or C, so a platform like Brex or Mercury that can work together quickly is a good option," the anonymous investor said.

Den, a multi-signature startup, has been using Mercury as a banking partner in conjunction with on-chain assets.

Speaking about the Mercury partnership process, Den co-founder Jonah Erlich said Den is taking advice from venture capitalists looking to increase the percentage of funds it holds on the chain following the weekend's breakout. It's been a very smooth process for us and we're staying with Mercury, but also exploring opening accounts on similar fintech platforms using clearing accounts and GSIBs [global systemically important banks]," he said.

Mercury is a fintech startup that works with two FDIC-insured banks, Evolve Bank and Trust and Choice Financial Group. Its checking and savings deposits can now be insured by the FDIC for up to $3 million, compared to the standard $250,000 threshold. This is thanks to the use of sweep networks, which allow customer deposits to be distributed across banks.

We had twice as many new customer additions today as we do on a normal business day," said Immad Akhund, CEO and founder of Mercury, over the weekend.

Another option in the U.S. is Customers Bank, but many of these bankers do not have the same access to deposits that Signature and Silvergate offer, said Michael Safai, co-founder and partner at Dexterity Capital, a trading firm.

Regional and community banks

Another challenge is that none of the large U.S. banks or even regional banks support holding tokens or crypto assets.

Mercury itself is privately held, but its partner, Choice Financial Group, trades it publicly. Despite U.S. President Joe Biden's assurances on Monday, the stocks of many regional and large public banks have also fallen severely in the wake of recent events.

Neil Zhang, founder of prediction market startup Frontrunner, has had trouble securing bank partnerships due to the double whammy of running a web3 company that focuses on online betting. His startup now relies on two regional banks, MVB and Western Alliance, neither of which immediately responded to a request for comment on its product.

It took us a long time to find two banks that would take us on, and while they're not the newest or most technically advanced, we've been happy with their service since switching from Brex earlier this year," Zhang said.

He added that the company does not intend to abandon either bank, but has been looking to diversify further, despite the fact that both banks have taken significant hits in the open market.

Assets on the Chain

Many crypto startups store at least some assets on the chain, Zhang said, adding that Frontrunner primarily holds legal funds, but crypto assets are stored in the multi-signed Gnosis Safe wallet. The startup hasn't received any guidance from investors who suggested it change that approach, he added.

Thibaut Sahaghian, CEO of Multis, a Web3 company card startup, said Multis has also not received any advice from investors and is simply allocating funds to multiple banks. He added that it is still attracting many web3 customers because it is a viable alternative to Mercury's offering of checking accounts and corporate cards.

As of now, Multis is in a good financial position," Sahaghian said. We are fortunate to have limited exposure to SVB and we still have sufficient funds in multiple accounts (including ours) in USD, EUR, USDC, DAI, ETH and BTC," said Sahaghian.

The startup currently uses Synapse, which works with Lineage Bank, for banking purposes and does not plan to change providers. Synapse and Lineage Bank did not immediately respond to a request for comment on their products.

We are not immune to moral hazard and therefore need to diversify into various assets to keep the business running, and USDC and stablecoins are only part of the answer, as redemptions have been affected by the current crisis, by relying on centralized issuance of fiat currencies," he said. But we are moving in the right direction."

Eyes turn outside the U.S.

Startups not based in the U.S. have the advantage of taking advantage of players like Sygnum and Seba Bank - Swiss banks that are also allowed to hold crypto assets.

Sygnum Chief Client Officer Martin Burgherr told The Block that the bank received a large number of inquiries following the impact of Silvergate, but they were unable to fully fill the void due to the company's strategic decision not to serve U.S. clients.

Crypto companies looking for new banks 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 some cryptocurrency-friendly and trustworthy options in Europe." Translated with www.DeepL.com/Translator (free version)