Author of this article: Iris, Liu Honglin

According to a report by Fox News 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 "de-banking" of cryptocurrency companies. Prior to this, the U.S. House Committee on Oversight and Government Reform had already sent letters to several cryptocurrency company executives, requesting explanations on this issue.

In recent years, "de-banking" has gradually become a key feature of the cryptocurrency industry. From payment interruptions to financing bottlenecks, and the transformation of custody services, in the current situation where traditional financial institutions are disconnected from the Web3 industry, cryptocurrency companies are also trying to find a way to "break free" from traditional finance and complete decentralization.

However, is de-banking really an inevitable trend? Or is it merely a short-term reaction to the regulatory pressures of traditional finance? More importantly, what impact does this trend have on the development prospects of the cryptocurrency industry?

Mankun Law Firm will explore this issue based on the regulatory policies of representative countries and regions around the world in this article.

What is De-banking?

In the cryptocurrency industry, banks, as important pillars of traditional financial institutions, have long maintained a close relationship with the development of the cryptocurrency industry. For example, in the early stages of the cryptocurrency industry, banks provided fiat currency deposit channels, ensuring the flow between crypto assets and real currency; during the institutional development process, banks also acted as custodians, providing asset security and credit endorsement for cryptocurrency companies; even in some cutting-edge technology collaborations, banks actively participated in blockchain application trials, empowering cryptocurrency technology.

However, in recent years, this cooperative relationship has been undergoing subtle changes. As the regulatory environment continues to tighten, the relationship between banks and the cryptocurrency industry has begun to gradually strain.

On one hand, the anonymity and cross-border liquidity of the cryptocurrency industry place higher compliance pressures on banks. The requirements of anti-money laundering (AML) and know your customer (KYC) regulations force banks to invest significant resources when cooperating with cryptocurrency companies, and these high compliance costs deter some banks; on the other hand, the extreme volatility of cryptocurrency asset prices further deepens banks' concerns about market risks. Traditional financial institutions believe that the high-risk nature of the cryptocurrency industry may pose a threat to their stability.

In addition, the ongoing changes in the policy environment have also exacerbated banks' cautious attitudes. Regulatory agencies in some countries frequently pressure banks to limit or terminate services to cryptocurrency companies, while certain opaque projects and fund flows have raised banks' alertness to potential illegal activities. More importantly, with the rise of technologies such as stablecoins and decentralized finance (DeFi), traditional banks also face competitive pressure from the cryptocurrency industry, and this potential market threat has further decreased some banks' willingness to cooperate with the cryptocurrency industry.

As a result of these combined factors, some countries, represented by the United States, have seen the phenomenon of "de-banking" in the cryptocurrency industry: payment channels being closed, accounts frozen, traditional banks gradually withdrawing from the cryptocurrency asset custody market, and even some banks explicitly stating that they will no longer provide services to cryptocurrency companies.

Interestingly, de-banking is not solely driven by banks; the cryptocurrency industry is also actively seeking alternatives to reduce its reliance on traditional banks. In the payment sector, stablecoins and on-chain payment protocols are gradually replacing bank accounts and payment networks, becoming the main payment tools in the cryptocurrency industry; in terms of custody services, native cryptocurrency companies, such as Fireblocks and Anchorage, not only provide compliant custody services but also integrate technologies like secure multi-party computation (MPC) to fill the gaps left by traditional bank custody services; in financing, the rise of DeFi protocols allows cryptocurrency companies to raise funds directly through on-chain tools, completely bypassing the restrictions of the banking system.

However, the alternative solutions in the cryptocurrency industry cannot fully replace the key roles of traditional banks.

Challenges of De-banking

Although the trend of de-banking seems to provide the cryptocurrency industry with opportunities to bypass the traditional financial system, Mankun Law Firm believes that this trend also brings significant challenges. These challenges may not only hinder the development of the cryptocurrency industry but also weaken the industry's influence on traditional financial markets to some extent.

1. Crisis of Trust

As core institutions in the traditional financial system, the credit endorsement of banks cannot be easily replaced by the cryptocurrency industry.

Transactions conducted through bank accounts are typically viewed as legitimate and compliant, while completely bypassing banks in de-banking operations may weaken public and institutional trust in the cryptocurrency industry. For example, while stablecoins can replace bank payment networks to some extent, if the reserve assets behind them are not held by banks, the value support of stablecoins will be called into question.

Moreover, in the absence of bank involvement, the cryptocurrency industry must bear higher compliance costs, such as independently establishing AML and KYC systems, and the standardization and credibility of these systems still need to be strengthened.

2. Asset Security

The experience and security assurance capabilities of traditional banks in asset custody are difficult for the current alternative solutions in the cryptocurrency industry to match.

Although some native cryptocurrency companies offer innovative custody 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, as the lack of bank-level guarantees may reduce their willingness to invest in crypto assets.

3. Financial Isolation

De-banking causes the payment networks of the cryptocurrency industry to gradually detach from the traditional financial system. While this improves the efficiency of on-chain payments, it may also lead to a financial island effect.

The payment and financing networks within the cryptocurrency industry may not achieve seamless integration with traditional financial markets, thereby limiting the mainstream application of crypto assets. For instance, if certain large multinational companies cannot connect their bank accounts with cryptocurrency payment networks, their willingness to adopt crypto assets as a payment method will also decrease.

4. Regulatory Pressure

Completely de-banking operations may trigger greater regulatory pressure.

In recent years, governments around the world have continued to strengthen regulations on the cryptocurrency industry, and de-banking may be seen as a strategy for the cryptocurrency industry to evade traditional financial regulations, leading to more scrutiny and restrictions. For example, the EU's MiCA regulation requires stablecoin issuers to store a portion 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 cryptocurrency industry and regulatory agencies, and even trigger more restrictive policies.

5. Industry Fragmentation

The process of de-banking is not balanced; large cryptocurrency enterprises often have more resources to seek alternative solutions, while small and medium-sized enterprises may face greater challenges. For example, large enterprises can establish internal compliance systems and directly communicate with regulatory agencies, but small and medium-sized enterprises may fall into compliance dilemmas due to a lack of resources. In the long run, this imbalance may lead to further fragmentation within the industry, exacerbating the trend of resource concentration towards leading enterprises, which is not conducive to the diversified development of the industry.

Banks in Global Regulation

In the previous section, Mankun Law Firm mentioned that the EU's MiCA legislation regarding stablecoins requires issuers to comply with strict reserve requirements, storing at least 30% of their reserve assets in fiat currency in EU-authorized banks to ensure that the value of stablecoins remains pegged to the underlying assets. At the same time, the MiCA legislation also proposes compliance requirements for custodians and cryptocurrency service providers, mandating them to fulfill AML and KYC obligations. Particularly in the custody field, MiCA aims to enhance asset security through authorized custodial banks, which to some extent offsets the impact of the de-banking trend.

This regulatory logic of re-bundling banks with the cryptocurrency industry is not only present in the EU but also reflected 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 licenses from the Monetary Authority of Singapore (MAS). This not only sets 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 continue to follow a similar approach. According to the latest guidelines from the Securities and Futures Commission (SFC) of Hong Kong, stablecoin issuers must hold proof of assets from regulated banks or trust companies. Additionally, Hong Kong imposes higher requirements on exchanges and custodians, mandating them to establish effective internal control measures to prevent fund misuse while providing higher security assurances for market participants. These requirements not only reflect a concern for user protection but also demonstrate the regulatory agencies' emphasis on the indispensable role of banks in the compliance chain.

It is evident that, whether in the EU, Asia, or other regions, the global trend of cryptocurrency regulation does not fully support "de-banking." On the contrary, regulatory agencies in various countries are incorporating banks into the core of the cryptocurrency ecosystem through regulatory design, aiming to ensure industry development while reducing potential systemic risks.

Summary by Mankun Law Firm

The phenomenon of de-banking reveals the cryptocurrency industry's efforts to break free from the constraints of traditional finance and reflects the growing pains of the global financial system in the face of technological changes.

The core roles of traditional banks in payment clearing, asset custody, and credit endorsement remain foundational elements that the cryptocurrency industry currently finds difficult to fully replace. Although the technological innovations in the cryptocurrency industry in the fields of payment and financing demonstrate great potential, insufficient trust, regulatory friction, and technological risks continue to constrain its further development.

Therefore, complete de-banking is not a realistic or feasible path; the current de-banking trend is more like a catalyst pushing the cryptocurrency industry and traditional finance to seek a new balance rather than a simple separation. More importantly, this phenomenon also provides an opportunity for reflection and adjustment within the global financial system. De-banking should not merely be viewed as a unilateral experiment by the cryptocurrency industry but rather as the beginning of a collaborative exploration of future financial models between traditional finance and emerging technologies.

As Mankun Law Firm has consistently advocated, the judiciary and regulation should not be at odds with technology but should seek breakthroughs through integration. In the future, only under the joint drive of innovation and compliance can de-banking move beyond fragmentation and contradictions to become a key driving force in building a new financial ecosystem. This is not only a crucial part of the cryptocurrency industry's self-evolution but may also become a historical node in the reshaping of the global financial order.

Fortunately, as of the writing of this article, the U.S. hearing on de-banking has been successfully held, focusing on the impact of account closures and financial service restrictions on businesses and individuals. During the hearing, several witnesses pointed out that regulatory pressure on banks has led to the severing of business relationships with cryptocurrency-related companies, which not only affects the normal operation of the industry but also weakens the United States' competitiveness in the global digital economy.

At the same time, the Federal Deposit Insurance Corporation (FDIC) released a lengthy 790-page document acknowledging that past regulatory measures on the cryptocurrency industry were overly strict and stated that it would reassess relevant policies. FDIC acting leader Travis Hill further promised during the hearing to provide banks with clearer regulatory guidance to ensure they can participate in blockchain and cryptocurrency-related businesses within a legal and compliant framework.

This hearing and the FDIC's change in attitude signal a potential loosening of U.S. regulatory policies towards the cryptocurrency industry. However, this does not mean that the traditional financial system will completely open its doors to cryptocurrency companies; rather, it appears to be a recalibration of regulation between policy and market demand. The relationship between banks and the cryptocurrency industry may be entering a period of easing, but real market changes will still depend on the pace and strength of regulatory implementation.

At least, the first step towards integration has been taken.

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