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?
Separation or integration, that is the question.
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 the phenomenon of "debanking" targeting cryptocurrency companies. Prior to this, the U.S. House Oversight and Government Reform Committee had already sent letters to executives at multiple crypto firms, requesting explanations regarding this issue.
In recent years, "debanking" has gradually become a defining feature of the crypto industry. From payment disruptions and funding 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 toward independence from traditional finance and full decentralization.
Yet, is debanking truly an inevitable trend? Or merely a short-term reaction to regulatory pressure within 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 across key global jurisdictions.
What Is Debanking?
Within the crypto industry, banks—longstanding pillars of traditional finance—have historically maintained close ties with the sector’s development. In the early days of crypto, banks enabled fiat on-ramps, ensuring liquidity between digital assets and real-world currencies. As institutional adoption grew, banks also served as custodians, providing security and credibility for crypto firms. Even in cutting-edge collaborations, some banks actively participated in blockchain pilot programs, supporting the advancement of crypto technologies.
However, this cooperative relationship has subtly shifted in recent years. With tightening regulatory environments, tensions between banks and the crypto industry have begun to rise.
On one hand, the anonymity and cross-border nature of crypto activities place banks under heightened compliance burdens. Anti-money laundering (AML) and know-your-customer (KYC) regulations require significant investment when partnering with crypto firms, driving some banks away due to high compliance costs. On the other hand, the extreme volatility of crypto asset prices deepens banks’ concerns about market risk, with traditional institutions viewing the high-risk profile of crypto as a potential threat to their stability.
Additionally, ongoing shifts in policy have intensified banks’ caution. Regulators in certain countries continue pressuring banks to restrict or terminate services for crypto firms, while opaque projects and fund flows raise red flags about potential illegal activity. Crucially, the rise of stablecoins and decentralized finance (DeFi) introduces competitive threats from the crypto space itself, further diminishing some banks’ willingness to engage.
Under these combined pressures, countries like the United States have seen a growing trend of "debanking" in the crypto sector: payment channels shut down, accounts frozen, traditional banks exiting crypto custody markets, and some institutions explicitly stating they will no longer serve crypto companies.
Interestingly, debanking is not solely driven by banks—crypto firms are also proactively seeking alternatives to reduce reliance on traditional banking. In payments, stablecoins and on-chain payment protocols are increasingly replacing bank accounts and traditional networks as primary tools. In custody, native crypto firms such as Fireblocks and Anchorage offer compliant solutions enhanced with technologies like multi-party computation (MPC), filling gaps left by traditional banks. In financing, the rise of DeFi allows crypto companies to raise capital directly via on-chain instruments, entirely bypassing traditional banking constraints.
Nevertheless, these alternative solutions cannot yet fully replace the core functions provided by traditional banks.
Challenges of Debanking
While debanking may appear to offer the crypto industry an escape from traditional finance, Manqin Law believes this trend brings significant challenges that could hinder industry growth and weaken its influence over traditional financial markets.
- Trust Deficit
Banks, as central institutions in traditional finance, 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 may erode public and institutional trust in the crypto sector. For example, while stablecoins can partially substitute for traditional payment rails, their value backing becomes questionable if reserve assets are not held in bank custody.
Moreover, without bank involvement, the crypto industry must independently bear higher compliance costs—such as establishing AML and KYC frameworks—whose standardization and reliability remain works in progress.
- Asset Security
The experience and security capabilities of traditional banks in asset custody remain unmatched by current crypto-native alternatives.
Although innovative custody services exist within the crypto ecosystem, they still face risks including technical vulnerabilities, smart contract flaws, and cyberattacks. More critically, post-debanking, the credibility of custody solutions may be questioned—particularly by traditional institutional investors, whose appetite for crypto investments may decline without bank-grade safeguards.
- Financial Isolation
Debanking risks disconnecting crypto payment networks from the broader financial system, creating efficiency gains but also potential silos.
Internal crypto payment and financing systems may struggle to integrate seamlessly with traditional financial markets, limiting mainstream adoption. For instance, 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 attract even greater regulatory scrutiny.
Governments worldwide are intensifying oversight of the crypto industry. Debaking might be interpreted as an attempt to circumvent traditional financial regulation, triggering additional investigations and restrictions. For example, the EU's MiCA regulation mandates that stablecoin issuers store part of their reserves in authorized banks to ensure value stability—a requirement directly contradicted by debanking trends. Such regulatory conflicts may exacerbate tensions between the crypto industry and regulators, potentially leading to stricter policies.
- Industry Fragmentation
The debanking process is uneven. Larger crypto enterprises often have more resources to develop alternatives, while small and medium-sized firms face disproportionate challenges. Large firms can build internal compliance teams and engage directly with regulators, whereas smaller players may lack the means to meet regulatory demands. Over time, this imbalance could deepen industry fragmentation, concentrating resources among top-tier firms and undermining diversity and innovation.
Banks in Global Regulation
As noted earlier, the EU’s MiCA legislation requires stablecoin issuers to comply with strict reserve rules, mandating that at least 30% of reserves be held in euros or other fiat currencies at EU-authorized banks—ensuring stablecoin values remain anchored to underlying assets. Additionally, MiCA sets compliance obligations for custodians and crypto service providers, requiring them to fulfill AML and KYC duties. Particularly in custody, MiCA aims to enhance asset security by authorizing regulated banks, thereby countering debanking tendencies.
This regulatory logic—reintegrating banks into the crypto ecosystem—is not unique to the EU; it appears in regulatory frameworks across Singapore, Hong Kong, and other jurisdictions. Under Singapore’s Payment Services Act (PSA), digital payment token (DPT) providers—including stablecoin operators—must obtain licensing from the Monetary Authority of Singapore (MAS). Beyond regulating exchanges and payment 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. Moreover, Hong Kong imposes higher standards on exchanges and custodians, requiring robust internal controls to prevent misuse of funds and enhance investor protection. These measures reflect not only a focus on user safety but also recognition of banks’ indispensable role in the compliance chain.
Clearly, whether in Europe, Asia, or elsewhere, global crypto regulation does not fully endorse “debanking.” Instead, regulators are designing rules that embed banks within the core of the crypto ecosystem—supporting innovation while mitigating systemic risks.
Manqin Law Summary
The debanking phenomenon reveals the crypto industry’s effort to break free from traditional financial constraints, as well as the growing pains of the global financial system amid technological change.
The foundational roles of traditional banks—in payment clearing, asset custody, and credibility—remain irreplaceable for now. Despite the immense potential demonstrated by crypto innovations in payments and financing, insufficient trust, regulatory friction, and technological risks continue to limit broader progress.
Therefore, full debanking is neither practical nor sustainable. Current debanking trends are better understood as catalysts pushing the crypto industry and traditional finance toward a new equilibrium—not a clean break. More importantly, this shift offers a moment of reflection and recalibration for the global financial system. Debaking should not be seen as a unilateral experiment by crypto alone, but as the beginning of a joint exploration between legacy finance and emerging technologies into the future of finance.
As Manqin Law has long advocated, regulation and technology should not stand in opposition—but seek breakthroughs through integration. Only through the dual drivers of innovation and compliance can debanking evolve beyond division and conflict, becoming a key force in building a new financial ecosystem. This marks not just a crucial step in the self-evolution of the crypto industry, but potentially a historic turning point in reshaping the global financial order.
On a positive note, the U.S. hearing on debanking has successfully taken place as of this writing. 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 relationships with crypto-related enterprises—disrupting normal industry operations and weakening America’s competitiveness in the global digital economy.
Meanwhile, the Federal Deposit Insurance Corporation (FDIC) released a 790-page report acknowledging that past regulatory actions toward the crypto industry were overly restrictive, and stated its intention to reevaluate relevant policies. FDIC acting director Travis Hill further committed during the hearing to provide clearer regulatory guidance for banks, enabling them to participate in blockchain and crypto-related activities within a lawful and compliant framework.
These developments signal a potential softening in 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 policy in response to market demand. While relations between banks and the crypto sector may be entering a period of easing, real market transformation will depend on the pace and rigor of regulatory implementation.
But at least, the first step toward integration has been taken.
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