The Dilemma of De-banking: Does the Crypto Industry Need to Break Away from Traditional Finance?
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The Dilemma of De-banking: Does the Crypto Industry Need to Break Away from Traditional Finance?
The de-banking phenomenon reveals the crypto industry's attempt to break free from traditional financial constraints, and also reflects the growing pains of the global financial system in the face of technological change.
Navigating Web3 tides with focused insightsAuthors: Iris, Liu Honglin
According to Fox News reporter Eleanor Terrett on January 25, the U.S. Senate Banking Committee announced a hearing scheduled for February 5 (U.S. time) to discuss banks' "debanking" of cryptocurrency companies. Prior to this, the U.S. House Committee on Oversight and Government Reform had already sent letters to executives of multiple crypto firms requesting explanations on this issue.
In recent years, "debanking" has gradually become a key feature of the crypto industry. From payment disruptions and financing bottlenecks to shifts in custody services, amid the growing divide between traditional financial institutions and the Web3 sector, crypto companies are attempting to forge a path that moves away from traditional finance and toward full decentralization.
Yet, is debanking truly an inevitable trend? Or is it merely a short-term reaction to regulatory pressure from traditional finance? More importantly, what impact does this trend have on the future development of the crypto industry?
In this article, ManQin Law explores these questions based on current regulatory policies in representative countries and regions worldwide.
What Is Debanking?
In the crypto industry, banks—as a cornerstone of traditional financial institutions—have long maintained close ties with industry development. For example, during the early stages of crypto, banks enabled fiat on-ramps, ensuring liquidity between digital assets and real-world currencies. During institutionalization, banks also served as custodians, providing asset security and credit endorsement for crypto firms. In some cutting-edge collaborations, banks even actively participated in blockchain application trials, empowering crypto technologies.
However, in recent years, this cooperative relationship has begun to shift subtly. As the regulatory environment tightens, the relationship between banks and the crypto industry is becoming increasingly strained.
On one hand, the anonymity and cross-border mobility inherent in crypto expose banks to higher compliance burdens. Anti-money laundering (AML) and know-your-customer (KYC) regulations force banks to invest significant resources when partnering with crypto firms, and these high compliance costs deter some institutions. On the other hand, the extreme volatility of crypto asset prices deepens banks’ concerns about market risk, with traditional financial institutions viewing the high-risk nature of crypto as a potential threat to their stability.
Additionally, evolving policy environments intensify banks’ caution. Regulators in certain countries continue pressuring banks to restrict or terminate services to crypto firms, while opaque projects and unclear fund flows heighten banks’ alertness to potential illegal activities. More critically, with the rise of stablecoins and decentralized finance (DeFi), traditional banks now face competitive threats from within the crypto space itself, further reducing their willingness to collaborate.
Under the combined influence of these factors, a phenomenon of “debanking” in the crypto sector has emerged in countries like the United States: payment channels are being shut down, accounts frozen, traditional banks gradually exiting crypto custody markets, and some banks explicitly stating they will no longer serve crypto companies.
Interestingly, debanking is not solely driven by banks—crypto firms themselves are proactively seeking alternatives to reduce reliance on traditional banking. In payments, stablecoins and on-chain payment protocols are increasingly replacing bank accounts and traditional payment networks as the primary tools in the crypto ecosystem. In custody, native crypto firms such as Fireblocks and Anchorage not only offer compliant custody solutions but also integrate advanced technologies like multi-party computation (MPC) to fill the gap left by traditional banks. In financing, the rise of DeFi protocols enables crypto firms to raise capital directly through on-chain instruments, entirely bypassing traditional banking constraints.
Nevertheless, these alternative solutions within the crypto industry cannot yet fully replace the critical functions performed by traditional banks.
Challenges of Debanking
While the trend of debanking appears to offer the crypto industry an opportunity to circumvent the traditional financial system, ManQin Law believes this shift also brings significant challenges. These issues may not only hinder the growth of the crypto sector but could also weaken its influence over traditional financial markets.
Trust Crisis
Banks, as core institutions in the traditional financial system, provide a level of credibility that the crypto industry cannot easily replicate.
Transactions conducted through bank accounts are generally perceived as legal and compliant. Fully bypassing banks through debanking may erode public and institutional trust in the crypto industry. For instance, while stablecoins can partially substitute for traditional payment networks, if their reserve assets are not held by banks, questions arise about the reliability of their value backing.
Moreover, without bank involvement, the crypto industry must shoulder greater compliance costs—such as independently establishing AML and KYC systems—whose standardization and credibility remain works in progress.
Asset Security
The experience and security capabilities of traditional banks in asset custody are difficult for current crypto-native alternatives to match.
Although some crypto-native firms offer innovative custody services, these solutions still face risks such as technical vulnerabilities, smart contract flaws, and cyberattacks. More importantly, post-debanking, the credibility of custody services may be questioned—particularly by traditional institutional investors, for whom the absence of bank-grade safeguards could diminish appetite for investing in crypto assets.
Financial Isolation
Debanking causes the crypto industry’s payment networks to gradually detach from the traditional financial system. While this improves on-chain payment efficiency, it may also lead to financial silo effects.
The internal payment and financing networks of the crypto industry may fail to seamlessly integrate with traditional financial markets, limiting mainstream adoption of crypto assets. For example, large multinational corporations unable to link bank accounts with crypto payment networks may be less inclined to adopt crypto as a payment method.
Regulatory Pressure
Fully debanked operations may trigger increased regulatory scrutiny.
In recent years, governments worldwide have intensified oversight of the crypto industry. Debanking might be interpreted as a strategy to evade traditional financial regulation, inviting more investigations and restrictions. For example, the EU’s MiCA regulation requires stablecoin issuers to store part of their reserves in banks to ensure value stability—directly conflicting with debanking trends. Such regulatory contradictions could exacerbate tensions between the crypto industry and regulators, potentially leading to more restrictive policies.
Industry Fragmentation
The process of debanking is uneven. Large crypto enterprises often have more resources to develop alternatives, while small and medium-sized firms face greater hurdles. For instance, major firms can build internal compliance systems and engage directly with regulators, whereas smaller players may struggle due to limited resources. Over time, this imbalance could deepen industry fragmentation, accelerating concentration of resources among top-tier firms and undermining sector-wide diversity.
Banks in Global Regulation
As previously noted by ManQin Law, the EU's MiCA regulation mandates strict reserve requirements for stablecoins, requiring issuers to hold at least 30% of reserves in euros or other fiat currencies deposited with authorized banks within the EU—ensuring stablecoin values remain anchored to underlying assets. Additionally, MiCA sets compliance obligations for custodians and crypto service providers, including AML and KYC duties. In custody specifically, MiCA aims to enhance asset security by authorizing custodial banks—a move that partially counters debanking trends.
This regulatory logic—reintegrating banks into the crypto ecosystem—is not unique to the EU; it also appears in regulatory frameworks across Singapore, Hong Kong, and other jurisdictions. In Singapore, the Payment Services Act (PSA) requires digital payment token (DPT) providers—including stablecoin operators—to obtain licenses from the Monetary Authority of Singapore (MAS). Beyond imposing requirements on payment and trading platforms, the law emphasizes that stablecoin issuers must partner with local banks to ensure compliant reserve management and payment settlement.
Likewise, Hong Kong follows a similar approach. According to recent guidance from the Securities and Futures Commission (SFC), stablecoin issuers must hold verifiable assets with regulated banks or trust companies. Furthermore, Hong Kong imposes stricter standards on exchanges and custodians, mandating robust internal controls to prevent misuse of funds and offering stronger protections for market participants. These rules reflect not only a focus on user protection but also underscore regulators’ recognition of banks as indispensable actors in the compliance chain.
Clearly, whether in the EU, Asia, or elsewhere, global crypto regulation does not fully support "debanking." Instead, regulators are designing rules that embed banks within the core of the crypto ecosystem—to foster innovation while mitigating systemic risks.
ManQin Law Conclusion
The debanking phenomenon reveals the crypto industry’s attempt to break free from traditional financial constraints, as well as the growing pains of the global financial system amid technological change.
The central roles of traditional banks in payment clearing, asset custody, and credit endorsement remain foundational elements that the crypto industry cannot yet fully replace. Despite the immense potential demonstrated by technological innovations in payments and financing, insufficient trust, regulatory friction, and technical risks continue to constrain broader development.
Therefore, complete debanking is neither realistic nor viable. Current debanking trends are better understood as catalysts pushing the crypto industry and traditional finance toward a new equilibrium—not simply as a clean break. More importantly, this phenomenon offers the global financial system a chance to reflect and adapt. Debanking should not be seen merely as a unilateral experiment by the crypto sector, but rather as the beginning of a joint exploration between traditional finance and emerging technologies into the future of finance.
As ManQin Law has consistently advocated, jurisprudence and regulation should not oppose technology, but instead seek breakthroughs through integration. Only under the dual drivers of innovation and compliance can debanking evolve beyond division and conflict to become a key force in building a new financial ecosystem. This represents not only a crucial step in the self-evolution of the crypto industry but may also mark a historic turning point in the restructuring of the global financial order.
The good news is that, as of writing, the U.S. hearing on debanking has successfully taken place. The session focused on the impacts of account closures and financial service restrictions on businesses and individuals. Several witnesses highlighted how regulatory pressure on banks has led to severed business relationships with crypto-related firms—impairing normal industry operations and weakening America’s competitiveness in the global digital economy.
Meanwhile, the Federal Deposit Insurance Corporation (FDIC) released a 790-page document acknowledging that past regulatory actions toward the crypto industry were overly stringent and announcing plans to reevaluate relevant policies. FDIC acting director Travis Hill further committed during the hearing to provide clearer regulatory guidance for banks, ensuring they can participate in blockchain and crypto-related activities within a lawful and compliant framework.
This hearing and the FDIC’s policy shift signal a possible softening of U.S. regulatory stance toward the crypto industry. However, this does not mean traditional finance will fully open its doors to crypto firms. Rather, it reflects a recalibration of regulation in response to both policy needs and market demands. The relationship between banks and the crypto industry may be entering a period of easing, but real market transformation will depend on the pace and rigor of regulatory implementation.
But at the very least, the first step toward integration has been taken.
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