Crypto Banks Hit Reset While Shedding Risky Innovation Ambitions

Smaller banks that sought to serve once-hot sectors like cryptocurrency are now exiting those verticals.

This, as long-time crypto industry partner Silvergate Bank reports steep quarterly losses tied to $8.1 billion in withdrawals while it looks to reshuffle its digital asset business offerings, and Voyager Digital-servicing Metropolitan Commercial Bank and FTX-linked Moonstone Bank have both announced they are closing their crypto business lines and exiting the turbulent space.

Silvergate CEO Alan Lane said on a recent call with analysts that the bank plans to discontinue crypto custody services and eliminate a portion of its digital-asset product portfolio. The bank also plans to reduce its headcount by nearly 40%.

Metropolitan Commercial Bank, the one-time banking partner of bankrupt crypto brokerage Voyager Digital said its recent decision to exit the crypto marketplace will have minimal financial impact on operations.

“In the aggregate, [Metropolitan’s crypto clients] currently account for approximately 1.5% of total revenues and 6% of total deposits,” the bank said in a statement Jan. 9. “[Metropolitan’s] relationships with these clients are limited to providing debit card, payment and account services.”

The bank added in the statement that it has already commenced the process of closing out its relationships with these clients and expects to exit the crypto industry before the end of 2023.

As for Moonstone Bank, the situation appears to be a little more pressing.

Federal prosecutors have reportedly seized nearly $50 million in deposits, representing more than half of the bank’s total assets, in connection with their investigation into Sam Bankman-Fried’s alleged fraudulent activities at the helm of his former crypto exchange, FTX.

Small Banks Change Their Names

Moonstone Bank, America’s 26th smallest banking institution, which for more than a century operated as a single-branch agricultural lender in Washington State under the name Farmington State Bank, has since announced it is returning to its roots as a community bank and discontinuing its crypto and cannabis sector ambitions.

It is also changing its name back to Farmington State Bank.

“Farmington State Bank will cease using the Moonstone Bank name,” the bank said in a statement. “The Farmington State Bank brand, well-known for 135 years in the local community, will feature prominently throughout the bank’s branding, and customers will observe the changeover in the coming weeks.”

The bank added in the statement that it plans to return to its original mission and discontinue its “pursuit of an innovation-driven business model to develop banking services for industries such as crypto assets or hemp/cannabis.”

As reported by PYMNTS in 2020, a company called FBH Corporation acquired Farmington State Bank and began to embrace an innovative startup business model, with the goal to serve new customers in “underserved industries.”

FTX’s sister hedge fund Alameda Research, through its venture arm, invested $11.5 million for a noncontrolling minority interest in the bank as part of a January 2022 fundraise led by FBH. The bank’s name changed to “Moonstone” shortly after Alameda’s investment.

Not long thereafter, an account under the name of “FTX Digital Markets” deposited $49,999,500 into a “Moonstone” account. Per a report by The New York Times, prior to Alameda’s investment, Moonstone Bank was worth just $5.7 million.

That money has since been clawed back in actions related to broader efforts to seize FTX-linked assets as part of the company’s restructuring.

As relayed in the statement announcing the business retreat and name change, the “bank has consistently remained committed to safe and sound practices, has kept its balance sheet liquid and customer deposits have remained secure and fully accessible.”

As reported by Washington State publication The Spokesman-Review, prosecutors also seized an estimated $100 million from “FTX Digital Markets” accounts at four separate branches of Silvergate Bank.

Unique Advantages

The crypto industry has long been looked at askance by the traditional financial sector, and regulatory bodies have not viewed the digital asset landscape with much affection either — making it difficult for crypto businesses to find banking services.

Even FinTech companies struggle to acquire banking charters and find joining the Federal Reserve system uphill battle.

Federal Reserve Bank members gain access a suite of attractive benefits, particularly for previously unbanked organizations — including access to the SWIFT payment system and cheaper access to loans. Member organizations are additionally allowed to send money across borders via correspondent banking accounts.

The former Moonstone Bank was able to apply for and receive a Federal Reserve Bank membership despite its crypto connections.

“It’s just astonishing that all of this got approved,” wrote Sens. Elizabeth Warren and Tina Smith to Fed Chair Jerome Powell in a December letter pressing U.S. bank regulators to investigate ties between the industry and crypto firms.