Author: Iris, Liu Honglin
According to a report by Fox reporter Eleanor Terrett on January 25, the U.S. Senate Banking Committee announced that it will hold a hearing on February 5 (U.S. time) to discuss the phenomenon of banks' "de-banking" of cryptocurrency companies. Prior to this, the U.S. House of Representatives Oversight and Government Reform Committee had already sent letters to the heads of several crypto companies, asking for clarification on this issue.
In recent years, "de-banking" has gradually become a key feature of the crypto industry. From payment interruptions to financing bottlenecks, to the transformation of custody services, at a time when traditional financial institutions and the Web3 industry are separated, crypto companies are also trying to find a way to "get rid of" traditional finance and achieve complete decentralization.
However, is de-banking really an inevitable trend? Or is it just a short-term response to the pressure of traditional financial regulation? More importantly, what impact does this trend have on the development prospects of the crypto industry?
In this article, Attorney Mankiw will explore the current regulatory policies of representative countries and regions around the world.
What is Debanking?
In the crypto industry, banks, as an important pillar of traditional financial institutions, have long maintained a close relationship with the development of the crypto industry. For example, in the early days of the crypto industry, banks provided legal currency deposit channels to ensure the flow between crypto assets and real currencies; in the process of institutional development, banks also acted as custodians, providing asset security and credit endorsement for crypto companies; even in some cutting-edge technology cooperation, banks took the initiative to participate in blockchain application trials to empower crypto technology.
However, in recent years, this partnership has been subtly changing. As the regulatory environment continues to tighten, the relationship between banks and the crypto industry has begun to become increasingly strained.
On the one hand, the anonymity and cross-border liquidity of the crypto industry have put banks under greater compliance pressure. The requirements of anti-money laundering (AML) and know your customer (KYC) regulations force banks to invest a lot of resources when cooperating with crypto companies, and these high compliance costs have deterred some banks. On the other hand, the sharp fluctuations in the prices of crypto assets have further deepened banks' concerns about market risks. Traditional financial institutions believe that the high-risk attributes of the crypto industry may pose a threat to their stability.
In addition, the continuous changes in the policy environment have also intensified the cautious attitude of banks. Regulators in some countries have frequently put pressure on banks to limit or terminate their services to crypto companies, while certain opaque projects and capital flows have aroused banks' vigilance against potential illegal activities. More importantly, with the rise of technologies such as stablecoins and decentralized finance (DeFi), traditional banks also have to face competitive pressure from the crypto industry. This potential market threat has further reduced the willingness of some banks to cooperate with the crypto industry.
Under the combined influence of this series of factors, the crypto industry has seen a "de-banking" phenomenon in some countries, represented by the United States: payment channels have been closed, accounts have been frozen, traditional banks have gradually withdrawn from the crypto asset custody market, and some banks have even explicitly stated that they will no longer provide services to crypto companies.
Interestingly, de-banking is not entirely driven by banks alone. The crypto industry is also actively seeking alternatives and working to reduce its reliance on traditional banks. In the payment field, stablecoins and on-chain payment protocols have gradually replaced bank accounts and payment networks and become the main payment tools in the crypto industry. In terms of custody services, native crypto companies such as Fireblocks and Anchorage can not only provide compliant custody services, but also integrate technologies such as secure multi-party computing (MPC) to fill the gaps in traditional bank custody services. In terms of financing, the rise of DeFi protocols allows crypto companies to raise funds directly through on-chain tools, completely bypassing the restrictions of the banking system.
However, the crypto industry’s alternative solutions are not able to completely replace the key role of traditional banks.
The Challenge of Debanking
Although the trend of de-banking seems to provide the crypto industry with an opportunity to bypass the traditional financial system, Attorney Mankiw believes that this trend also brings challenges that cannot be ignored. These challenges may not only hinder the development of the crypto industry, but also weaken the industry's influence on the traditional financial market to a certain extent.
A crisis of confidence
As core institutions in the traditional financial system, banks' credit endorsement cannot be easily replaced by the crypto industry.
Transactions conducted through bank accounts are generally considered legal and compliant, and de-banking operations that completely bypass banks may undermine the public and institutional trust in the crypto industry. For example, although stablecoins can replace bank payment networks to a certain extent, if the reserve assets behind them cannot be held by banks, the value support of stablecoins will be questioned.
In addition, in the absence of banking involvement, the crypto 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
Traditional banks’ experience and security capabilities in asset custody are difficult to match by current alternatives in the crypto industry.
Although some native crypto companies provide innovative custody services, these services still face potential threats such as technical vulnerabilities, smart contract risks, and hacker attacks. More importantly, after de-banking, the credibility of custody services may be challenged, especially for traditional institutional investors, the lack of bank-level guarantees may reduce their willingness to invest in crypto assets.
Financial Isolation
Debanking has gradually separated the payment network of the crypto industry from the traditional financial system. Although this improves the efficiency of on-chain payments, it may also lead to a financial island effect.
The payment and financing networks within the crypto industry may not be able to seamlessly connect with traditional financial markets, thus limiting the mainstream application of crypto assets. For example, if some large multinational companies cannot connect to the crypto payment network through their bank accounts, their willingness to use crypto assets as a payment method will also be reduced.
Regulatory pressure
Complete de-banking could lead to greater regulatory pressure.
In recent years, governments around the world have continued to strengthen their regulation of the crypto industry. De-banking may be seen as a strategy for the crypto industry to circumvent traditional financial regulation, leading to more scrutiny and restrictions. For example, the EU MiCA regulations require stablecoin issuers to store part of their reserve assets in banks to ensure value support, while the trend of de-banking directly contradicts this requirement. Similar policy contradictions may lead to increased friction between the crypto industry and regulators, and even lead to the introduction of more restrictive policies.
Internal differentiation of the industry
The process of de-banking is not balanced. Large crypto companies often have more resources to seek alternatives, while small and medium-sized enterprises may face greater challenges. For example, large companies can establish internal compliance systems and communicate directly with regulators, but small and medium-sized enterprises may fall into compliance difficulties due to lack of resources. In the long run, this imbalance may lead to further differentiation within the industry, exacerbating the trend of resource concentration in leading enterprises, which is not conducive to the diversified development of the industry.
Banks under global regulation
In the above, lawyer Mankiw mentioned that the provisions on stablecoins in the EU MiCA Act require its issuers to comply with strict reserve requirements and store at least 30% of reserve assets in the form of legal tender in EU-authorized banks to ensure that the value of stablecoins can always be linked to the underlying assets. At the same time, the MiCA Act also puts forward compliance requirements for custodians and crypto service providers, requiring them to fulfill anti-money laundering (AML) and customer due diligence (KYC) obligations. Especially in the custody field, MiCA hopes to enhance asset security by authorizing custodian banks, which to some extent offsets the impact of the de-banking trend.
This regulatory logic of re-binding banks and the crypto industry is not only seen in the EU, but also 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 stablecoins, to obtain a license from the Monetary Authority of Singapore (MAS). This not only places requirements on payment services and trading platforms, but also emphasizes that stablecoin issuers must cooperate with local banks to ensure compliance with reserve management and payment clearing.
Similarly, Hong Kong's regulatory policies are also continuing a similar line of thinking. According to the latest guidance from the Hong Kong Securities and Futures Commission (SFC), stablecoin issuers must hold proof of assets from a regulated bank or trust company. In addition, Hong Kong has placed higher requirements on exchanges and custodians, who must establish effective internal control measures to prevent funds from being misused while providing greater security for market participants. These requirements not only reflect a focus on user protection, but also show that regulators value the indispensable role of banks in the compliance chain.
It can be seen that the trend of global crypto regulation does not fully support "de-banking" in the EU, Asia or other regions. On the contrary, regulators in various countries are incorporating banks into the core links of the crypto ecosystem through regulatory design in order to ensure the development of the industry while reducing potential systemic risks.
Attorney Mankiw's Summary
The debanking phenomenon reveals the crypto industry’s efforts to break free from traditional financial constraints and also reflects the pain of the global financial system in the face of technological change.
The core role of traditional banks in payment settlement, asset custody and credit endorsement is still the foundation that is difficult to completely replace in the current crypto industry. Although the crypto industry has shown great potential in technological innovation in the fields of payment and financing, lack of trust, regulatory friction and technical risks still restrict its further development.
Therefore, complete de-banking is not a realistic and feasible path. The current de-banking is more like a catalyst for the crypto industry and traditional finance to find a new balance, rather than a simple separation. More importantly, this phenomenon also provides an opportunity for the global financial system to reflect and adjust. De-banking should not be seen as just a unilateral experiment in the crypto industry, but the beginning of traditional finance and emerging technologies working together to explore the future financial model.
As attorney Mankiw has always advocated, justice and regulation should not be in opposition to technology, but should find breakthroughs in integration. In the future, only under the joint drive of innovation and compliance can de-banking not stop at differentiation and contradiction, but become a key driving force for building a new financial ecology. This is not only a key link in the self-evolution of the crypto industry, but also a historical node in the reshaping of the global financial order.
Fortunately, as of the time of writing, the hearing on Debanking in the United States has been successfully held, and the meeting discussed the impact of bank account closures and financial service restrictions on businesses and individuals. During the period, many witnesses pointed out that the pressure exerted by regulators on banks has led to banks severing their business relationship with cryptocurrency-related companies, which has not only affected the normal operation of the industry, but also weakened the competitiveness of the United States in the global digital economy.
At the same time, the U.S. Federal Deposit Insurance Corporation (FDIC) released a 790-page document, admitting that past regulatory measures on the crypto industry were too strict and said it would re-evaluate relevant policies. FDIC Acting Leader Travis Hill further promised at the hearing that he would provide banks with clearer regulatory guidance to ensure that they can participate in blockchain and cryptocurrency-related businesses within a legal and compliant framework.
This hearing and the FDIC's adjustment of attitude send a signal that US regulators may loosen their policies on the crypto industry. However, this does not mean that the traditional financial system will completely open its doors to crypto companies, but rather a recalibration of regulation between policy and market demand. The relationship between banks and the crypto industry may be welcoming an opportunity to ease, but the real market changes still depend on the pace and enforcement of regulation.
But at least, the first step towards integration has been taken.
