Why are crypto investment funds facing banking challenges?
A survey conducted by Alternative Investment Management Association (“AIMA”) in October 2024 found that crypto investment funds have regularly faced banking issues across the globe. Key findings were:
Rejection: 75% of crypto investment fund firms reported difficulties in accessing or expanding banking services for their funds, while 67% faced similar challenges for their investment managers. In contrast, none of the traditional alternative investment managers surveyed encountered such issues.
Unexplained terminations: Among crypto investment fund firms that were informed of potential termination of their banking relationships, a staggering 98% did not receive any clear explanations for the decision.
Material impacts: The debanking of these firms adversely impacts operational efficiency, investor trust, and talent recruitment. This widespread issue within the US crypto industry, often referred to as “Operation Choke Point 2.0,” has significant implications for the United States’ standing as a global leader in financial innovation and open markets.
Crypto investment funds are facing challenges in opening bank accounts for several reasons:
- Regulatory Uncertainty: The regulatory environment surrounding cryptocurrencies is still evolving, with some jurisdictions having more established rules than others. Regulatory arbitrage is common among crypto businesses, and multiple agencies may oversee regulations. This makes it more difficult for banks to determine if their clients’ activities fully comply with applicable laws.
- Regulatory Risk: Many banks view cryptocurrencies as high-risk due to their volatility, perceived association with illicit activities, and the potential for fraud. Some banks are hesitant to engage with crypto businesses due to perceived concerns about their compliance with anti-money laundering (“AML”) and know-your-customer (“KYC”) regulations. This makes banks wary of exposing themselves to potential regulatory, legal and financial risks. As such, some banks have taken a blanket approach in terms of rejecting businesses working in the digital asset space.
- Reputational Risk: Banks are concerned about the reputational risks associated with being connected to the cryptocurrency market, especially after high-profile failures such as FTX, TerraUSD and Celsius.
- Lack of Understanding: Some banks are still developing their understanding of the technology and business models behind cryptocurrencies. Given the fast-moving nature of the sector, this can lead to reluctance to work with crypto investment funds.
- Compliance Costs: Banks may seek to limit their exposure to crypto-related businesses because of the expense and complexity of ensuring effective compliance with various laws and regulations.
- Pressure from Regulators: Some banks may face indirect pressure from regulators to avoid associations with cryptocurrencies, especially where there are high profile enforcement actions and litigations against major crypto businesses. In the US, the appointment of Paul Atkins as the new Chair of the Securities and Exchange Commission has been warmly welcomed by the crypto industry due to his extensive experience as an advisor in the digital asset space. Such a leadership shift could pave the way for a more favorable regulatory environment, but in the meantime, agencies will continue to supervise and enforce law and legislation as it currently stands.
To navigate the challenges outlined above, crypto investment funds should seek relationships with banks and service providers that specialize in serving the cryptocurrency market or explore alternative financial services tailored for the industry.
In the Cayman Islands, the Cayman Islands Monetary Authority (“CIMA”) requires that investments funds have proper asset segregation and thus must have a dedicated bank account to hold the assets of the funds. As a leading governance firm and leader in the crypto space, Marfire is committed to facilitating connections for our clients with the right banking service providers who understand the unique needs of crypto organizations. Our extensive network and expertise in the financial sector enable us to make introductions that align with our client’s goals. Whether our clients require services tailored to crypto investment funds or other governance solutions, please reach out to us to explore how we can assist you.
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