GuShiio.com The phenomenon of debanking reveals the crypto industry’s efforts to escape traditional financial constraints, and also reflects the pain of the global financial system in the face of technological change.
Authors: Iris, Liu Honglin
According to a report by Fox reporter Eleanor Terrett on January 25, the U.S. Senate Banking Committee announced that it would hold a hearing on February 5 (U.S. time) to discuss banks ‘”de-banking” of cryptocurrency companies. Previously, the U.S. House Oversight and Government Reform Committee had already sent letters to the heads of several encryption companies, requesting 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 are separated from the Web3 industry, crypto companies are also trying to find a path to “get rid of” traditional finance and complete decentralization.
However, is de-banking really an inevitable trend? Or is it just a short-term response to the pressure of traditional financial supervision? More importantly, what impact does this trend have on the development prospects of the encryption industry?
Lawyer Mankiw will explore in this article based on the current regulatory policies of representative countries and regions around the world.
What is de-banking?
In the crypto industry, banks, as an important pillar of traditional financial institutions, have long been closely related to the development of the crypto industry. For example, in the early days of the encryption industry, banks ensured the flow between encryption assets and real money by providing legal currency deposit channels; in the process of institutional development, banks also acted as custodians, providing asset security and credit for encryption companies. Endorsement; even in some cutting-edge technology cooperation, banks actively participated in blockchain application trials to empower encryption technology.
However, in recent years, this cooperative relationship is undergoing subtle changes. As the regulatory environment continues to tighten, the relationship between banks and the crypto industry has begun to become increasingly tense.
On the one hand, the anonymity and cross-border liquidity of the crypto industry have put banks under higher compliance pressure. Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations have forced banks to invest a lot of resources when cooperating with crypto companies, and these high compliance costs have discouraged some banks; On the other hand, the violent fluctuations in the prices of crypto assets have further deepened banks ‘concerns about market risks. Traditional financial institutions believe that the high-risk nature of the crypto industry may pose a threat to its stability.
In addition, continued changes in the policy environment have also intensified banks ‘prudent attitude. Regulators in some countries frequently put pressure on banks to restrict or terminate services to crypto companies, while certain opaque projects and capital flows have raised banks ‘awareness of potential violations. More importantly, with the rise of technologies such as stablecoins and decentralized finance (DeFi), traditional banks still have to face competitive pressure from the crypto industry. This potential market threat has made some banks more willing to cooperate in the crypto industry. decline.
Under the combined effect of these series of factors, some countries represented by the United States have experienced the phenomenon of “de-banking” in the encryption industry: payment channels have been closed, accounts have been frozen, traditional banks have gradually withdrawn from the encryption asset custody market, and even some banks have made it clear that they will no longer provide services to encryption companies.
Interestingly, debanking is not entirely driven by banks unilaterally, and the crypto industry is also proactively seeking alternatives in an effort to reduce its reliance on traditional banks. In the field of payment, stablecoins and on-chain payment protocols have gradually replaced bank accounts and payment networks and become the main payment tools in the encryption industry; in terms of custody services, native encryption companies such as Fireblocks and Anchorage can not only provide compliant custody services, but also incorporate technologies such as Secure Multi-Party Computing (MPC) into them to make up for the gap in traditional bank custody services; In terms of financing, the rise of the DeFi protocol allows crypto companies to raise funds directly through on-chain tools, completely bypassing the restrictions of the banking system.
However, alternatives to the crypto industry are not completely able to replace the key role of traditional banks.
The challenge of debanking
Although the trend of debanking seems to provide the crypto industry with an opportunity to bypass the traditional financial system, lawyers Mankiw believe that this trend also poses challenges that cannot be ignored. These challenges may not only hinder the development of the crypto industry, but may also weaken the industry’s influence on traditional financial markets to a certain extent.
trust crisis
As the core institution in the traditional financial system, banks ‘credit endorsements cannot be easily replaced by the encryption industry.
Transactions conducted through bank accounts are often considered legal and compliant, and debanking operations that completely bypass banks may undermine 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 managed by banks, the value support of stablecoins will be questioned.
In addition, in the absence of bank intervention, the crypto industry needs to bear higher compliance costs, such as independently establishing anti-money laundering (AML) and know-your-customer (KYC) systems, whose standardization and credibility still need to be strengthened.
asset security
The experience and security capabilities of traditional banks in the field of asset custody are unmatched by current alternatives in the crypto industry.
Although some native crypto companies have provided innovative hosting services, these services still face potential threats such as technical vulnerabilities, smart contract risks, and hacking attacks. More importantly, after de-banking, the credibility of custody services may be challenged, especially for traditional institutional investors, where the lack of bank-level protection may reduce their willingness to invest in crypto assets.
Financial isolation
De-banking has gradually separated the payment network of the encryption industry from the traditional financial system. Although this improves the efficiency of on-chain payments, it may also lead to financial isolation.
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 are unable to connect with crypto payment networks through bank accounts, their willingness to use crypto assets as a payment method will also be reduced.
regulatory pressure
A complete de-banking operation could trigger greater regulatory pressure.
In recent years, governments of various countries have continued to strengthen their supervision of the crypto industry, and de-banking may be seen as a strategy for the crypto industry to circumvent traditional financial supervision, triggering more censorship and restrictions. For example, the EU MiCA regulations require issuers of stablecoins to store some reserve assets in banks to ensure value support, and the trend of de-banking directly runs counter to this requirement. Similar policy contradictions may lead to increased friction between the crypto industry and regulators, and even trigger the introduction of more restrictive policies.
Intra-industry differentiation
The process of debanking is uneven, with large crypto companies often having 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 engage in direct dialogue with regulators, but small and medium-sized companies may fall into compliance difficulties due to lack of resources. In the long run, this imbalance may lead to further differentiation within the industry, intensify the trend of concentration of resources to leading enterprises, and is not conducive to the diversified development of the industry.
Banks under global supervision
In the above, lawyer Mankiw mentioned that the provisions on stablecoins in the EU MiCA Act require their issuers to comply with strict reserve requirements and store at least 30% of reserve assets in legal tender in banks authorized by the EU., to ensure that the value of stablecoins can always be linked to the underlying assets. At the same time, the MiCA bill also introduces compliance requirements for custodians and crypto service providers, requiring them to comply with anti-money laundering (AML) and customer due diligence (KYC) obligations. Especially in the custody field, MiCA hopes to enhance asset security by authorizing custody banks, which will partially offset the impact of the debanking trend.
This regulatory logic that rebundles banks and the crypto industry not only appears in the European Union, 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 approval from the Monetary Authority of Singapore (MAS). This not only puts forward requirements for payment services and trading platforms, but also emphasizes that stablecoin issuers must cooperate with local banks to ensure compliance in reserve management and payment clearing.
Similarly, Hong Kong’s regulatory policies are continuing similar thinking. According to the latest guidance from the Hong Kong Securities and Futures Commission (SFC), stablecoin issuers need to hold asset certificates from regulated banks or trust companies. In addition, Hong Kong places higher requirements on exchanges and custodians, and must establish effective internal controls to prevent the abuse of funds while providing higher security for market participants. These requirements not only reflect the focus on user protection, but also demonstrate the importance regulators attach to banks ‘indispensable role in the compliance chain.
It can be seen that whether in the European Union, Asia or other regions, the trend of global crypto regulation does not fully support “de-banking.” On the contrary, regulators in various countries are adopting regulations to incorporate banks into the core aspects of the crypto ecosystem to ensure the development of the industry while reducing potential systemic risks.
Lawyer Mankiw concluded
The phenomenon of debanking reveals the crypto industry’s efforts to escape 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 clearing, asset custody and credit endorsement is still the foundation that the encryption industry is currently difficult to completely replace. Although the crypto industry has demonstrated great potential for technological innovation in the fields of payment and financing, lack of trust, regulatory frictions and technical risks still restrict its further development.
Therefore, full debanking is not a realistic and feasible path. The current debanking is more like a catalyst to promote 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. Debanking should not be seen just as a unilateral experiment in the crypto industry, but rather as a beginning for traditional finance and emerging technologies to work together to explore future financial models.
As lawyer Mankiw has always advocated, justice and supervision should not be opposed to technology, but should seek breakthroughs in integration. In the future, only driven by innovation and compliance can debanking not stop at differentiation and contradiction, but become a key driving force for building a new financial ecosystem. This is not only a key link in the self-evolution of the crypto industry, but is also likely to become a historical node in the reshaping of the global financial order.
Fortunately, as of writing, a hearing on Debanking in the United States has been successfully held. The meeting discussed the impact of bank account closures and financial service restrictions on businesses and individuals. During this period, several witnesses pointed out that regulators put pressure on banks, causing banks to cut off business relationships with cryptocurrency-related companies, which not only affected the normal operations of the industry, but also weakened the competitiveness of the United States in the global digital economy.
At the same time, the Federal Deposit Insurance Corporation (FDIC) issued a 790-page document admitting that past regulations on the crypto industry were too strict and said it would reassess relevant policies. Travis Hill, acting leader of the FDIC, further promised at the hearing to provide banks with clearer regulatory guidance to ensure that they can participate in blockchain and cryptocurrency-related businesses within a legal and compliance framework.
This hearing and the FDIC’s attitude adjustment sent a signal that U.S. regulators may loosen their policies on the crypto industry. However, this does not mean that the traditional financial system will fully open its doors to crypto companies, but more like a recalibration of regulation between policy and market demand. The relationship between banks and the crypto industry may be ushering in an opportunity to ease, but the real market changes still depend on the pace and enforcement of supervision.
But at least, the first step of integration has been taken.
