For most of the banks in the U.S., cryptocurrency businesses are pariahs. And for the Metropolitan Commercial Bank, they are “pioneers.” At least, that is how the chief technology officer of New York financial institution, Nick Rosenberg, describes them.
He told CoinDesk that they are indeed very interested in growing this vertical – about the bank’s crypto clientele. He said that they have also learned that it is a serious industry. There are some brilliant people involved too. There are also exciting ideas coming out which could change the way people do business.
While most of the banks cling to the adage “blockchain, not bitcoin,” the Metropolitan Commercial Bank stands out just by being one of the very few enthusiastically court deposit business from crypto firms.
These clients include a few exchanges and hedge funds, as well as some other crypto investors that bank at Metropolitan as it is easier to move their money to those exchanges quickly.
So far, it has proven a lucrative niche for Metropolitan. The bank disclosed in an investor presentation that cash management and foreign exchange conversion fees from cryptocurrency clients in the first quarter totaled $3.4 million. It helped the drive of more than 300% increase from a year earlier in the total non-interest income of Metropolitan, to $5.4 million.
If this doesn’t sound like a lot of money to you, you should keep in mind that Metropolitan is a community bank. With just $1.9 billion in total assets, it is less than one-1,000th the size of JPMorgan.
Despite the lucrative demand from crypto companies for banks to provide fiat liquidity, as well as other traditional services, bitcoin-friendly banks such as Metropolitan, are still as rare as they were about three years ago.
The president of the compliance service provider BitAML Inc, Joe Ciccolo, said that it is incredibly challenging for them. He also added that the legalized cannabis industry is also having a much easier time than their cryptocurrency clients.
One of the reasons why the Metropolitan Bank is an outlier in embracing the crypto industry is that most of the banks cannot stomach the risks. The regulatory risk is chief among them.
The regulations about anti-money-laundering require banks to identify their customers and even the customers of their customers, plus to track the flow of funds. While the public blockchains can help banks and law enforcement trace the movement of money, the pseudonymous nature of crypto addresses makes it hard to determine who is ultimately sending, as well as receiving the funds.
The historical association of Bitcoin with underground drug markets indeed is not helpful.
As bullish as the Metropolitan bankers may be, they still recognize the risks of working with crypto clients. Rosenberg said that it is a high-touch relationship, meaning one requiring extra diligence.
Concerning risk management, Rosenberg said that there are two crucial keys to serving crypto clients, the first one being extremely selective about client acquisitions, only working with companies which take compliance as seriously as the bank does, and the second one maintaining an open dialogue with regulators.
Some other risks
Compliance aside, the Metropolitan bank also has to insulate itself from the volatility its cryptocurrency customers live with every day. As we already mentioned, the bank only works with a fiat currency like dollars and never touches cryptocurrency directly.
But more subtly, it has minimized the risk to its balance sheet in the event crypto depositors’ balances suddenly shrink. To illustrate why this could be a concern, according to the SEC filing, the settlement accounts it maintains for exchanges totaled $281.2 million on the 31st of March, representing 17.4% of the total deposits of the bank.
Such a high concentration might probably be a concern.
However, Metropolitan does not use these accounts to fund long-term assets such as mortgages, but only cash and equivalents.
An analyst and managing director at the investment banking firm Keefe, Bruyette & Woods, named Collyn Gilbert, said that Metropolitan does not use a lot of these deposits in its everyday operations, only as it knows there is significant volatility there.
To be sure, the bank held another $100.8 million in corporate accounts for cryptocurrency firms, making up about 6.2% of total deposits as on the 31st of March. And these accounts do fund assets on the balance sheet.
But the corporate accounts, Gilbert explains, which clients are utilizing for normal business activities, such as payroll, are less volatile than settlement accounts, which hold money just for temporarily until a transaction is completed.
There is one more risk which Metropolitan has encountered in the crypto space, and it is what finance types call “headline risk.”
In January 2018, Metropolitan sent its customers a reminder of what it said was a longstanding policy of not accepting crypto-related wire transfers from entities that were outside the U.S. it has been reported that this was a new policy prompted by fraud. Metropolitan had to issue a public denial of that claim, to quell backlash.