Connection Magazine: The "Banking Breakthrough" Moment for Encryption Companies in the Trump Era

For years, encryption companies have been shut out of the banking system in the United States. However, after the Trump administration took office, a number of fintech companies extended an olive branch to encryption firms.

Written by: Joel Khalili, Wired Magazine Reporter

Translated by: Saoirse, Foresight News

At the beginning of last year, Azeem Khan, a New York-based encryption entrepreneur, had just raised $19 million in seed funding for his startup Morph and was looking for a place to store this money. Before applying for a U.S. bank account, he consulted a lawyer, who replied, "It is absolutely impossible for you to get this done without any obstacles."

It turns out that even such a pessimistic prediction seems overly optimistic. After being rejected by multiple American banks in six months, Khan had no choice but to give up. He ultimately chose to deposit part of his funds interest-free in a bank in the Cayman Islands, while the rest was converted into encryption assets and entrusted to a third-party custodian for management.

For a long time, founders in the cryptocurrency industry have had similar experiences: American banks either refuse to provide them with loans or checking accounts, or suddenly freeze their accounts. Without banking partners, crypto companies find it difficult to make progress. They cannot easily conduct service transactions in dollars, securely store investor funds and earn interest, and they even struggle to pay employee salaries and vendor payments. "This is a predicament that the entire industry is well aware of," Khan said.

Just over a year later, the situation welcomed a turning point. Since Trump returned to the White House in January this year and promised to end the so-called "discrimination" against encryption companies, several fintech companies in the U.S., including Meow, Mercury, and Brex, have been competing to provide banking services for encryption companies. Khan recently raised $25 million for his new encryption startup Miden, and he revealed that he has become a key target for these fintech companies.

This transition has made it much easier for encryption companies to register, recruit, and conduct business in the United States, aligning with Trump’s plan to create a "global cryptocurrency capital." However, their fate is still subject to the political winds. Although the Trump administration has created an atmosphere of policy loosening, there are still no legal provisions that can guarantee encryption companies long-term access to banking services.

"Although the current government is relatively friendly, the relevant policies have not been written into law. There are no new regulations that can ensure that the industry's situation will not be reversed again due to changes in leadership," Khan admitted.

During the Biden administration, the cryptocurrency industry felt frustrated due to the repeated difficulties imposed by banks, with industry insiders crying out, "This is a conspiracy." They claimed that the federal government is deliberately trying to exclude crypto companies from the banking system in an attempt to stifle the entire industry.

Cryptocurrency venture capitalist Nic Carter is a major advocate of this claim, referring to this so-called "discriminatory action" as "Operation Chokepoint 2.0." This name is derived from an anti-fraud initiative during the Obama administration: it was reported that under this initiative, U.S. officials encouraged banks to avoid doing business with the pornography industry, payday lending, and other industries that were not favored by policy.

After the Trump administration came to power, several subcommittees in Congress held multiple hearings on the so-called "Throttle Action 2.0." Subsequently, in March of this year, Senate Republicans proposed the Financial Institutions Reform, Modernization, and Relief Act (FIRM Act) aimed at prohibiting banks from considering "reputational risk" when reviewing account applications, in order to curb so-called discriminatory practices. However, the bill has not yet entered the voting phase.

For encryption companies, the current shift in policy atmosphere is undoubtedly a positive development. Although they face fewer obstacles in obtaining overseas bank accounts (many located in the Cayman Islands or Switzerland), overseas accounts have many drawbacks compared to domestic accounts in the United States: they cannot earn interest on deposits, the settlement process with domestic counterparties is cumbersome, account fees are high, and they cannot enjoy the deposit insurance provided by the Federal Deposit Insurance Corporation (FDIC), which offers up to $250,000 protection for each account holder.

According to informed sources, although well-known banks such as JPMorgan have begun internal testing of encryption technology, most are still unwilling to provide account services for cryptocurrency companies. "The big banks that ordinary people are familiar with have no connection to the cryptocurrency industry," said David McIntyre, Chief Operating Officer of the startup DoubleZero, which focuses on developing infrastructure specifically for encryption networks.

This situation has created opportunities for small fintech companies, allowing them to expand their deposit size by attracting clients from the encryption industry. "Nowadays, entrepreneurs in the cryptocurrency field basically choose platforms like Mercury or Meow," Khan said, "Meow's actions are particularly active; as soon as they see any cryptocurrency company announce financing, they immediately take the initiative to contact its founders."

These fintech companies often use "encryption-friendly" as a selling point, offering integrated services such as stablecoin transfers, and are far less rigid than traditional financial institutions. Take Meow as an example, its 30-year-old CEO Brandon Arvanaghi manages his LinkedIn profile like a TikTok account, complete with short videos.

"The technology of these American fintech companies is far more advanced than any unknown bank in the Cayman Islands or Switzerland. Whether it's platform functionality, customer service, or any other aspect, they are superior," McIntyre commented.

In response to the interview request for this article, Mercury declined, while Meow and Brex did not respond.

In fact, these fintech companies play the role of the "software layer": relying on traditional banks with U.S. licenses to conduct business, responsible for user interface development and customer expansion, while deposit management is handled by the partner banks. Specifically, Meow collaborates with Grasshopper Bank, while Brex and Mercury have established partnerships with multiple banks. This model was widely adopted in the U.S. during the COVID-19 pandemic, which forced banks to accelerate their digital service transformation.

"Ideally, this model allows banks to access more advanced technologies," said Craig Timm, senior director of anti-money laundering at the Association of Certified Anti-Money Laundering Specialists (ACAMS). ACAMS primarily conducts financial-related certification programs, and Timm has served as a financial crime expert at Bank of America and the U.S. Department of Justice. "For fintech companies, this means they can focus on their areas of strength - product development, marketing, and acquiring new customers - without having to spend huge amounts of money and energy to obtain a banking license (a process that is both complex and expensive)."

However, such collaborations usually require fintech companies to comply with the rules set by the partnering bank, including restrictions on the types of customers they can serve. For example, a spokesperson for Mercury stated that the company is unable to provide account services for encryption companies (including exchanges) that hold customer funds.

"They are just putting a layer of shell on top of someone else's banking foundation," explained McIntyre, who previously worked at Brex, "and they must adhere to the underwriting requirements, regulatory obligations, and specific standards for customer access of the partner banks."

Timm stated that in the past, expanding into new business areas (such as encryption-related businesses) has always been a source of friction between fintech companies and their partner banks. Fintech companies are focused on rapid expansion, while partner banks bear the ultimate responsibility for maintaining license compliance, including strict anti-money laundering controls.

"The reason why this type of cooperation often fails is that both parties lack consensus," Timm added, noting that sometimes there is also a situation of "inconsistent risk preferences."

This puts encryption companies in an uncertain position: although fintech companies are currently happy to provide them with US bank accounts, the partner banks behind them may revoke the authorization in the future.

When asked whether the partner banks are committed to providing long-term services for encryption currency clients, neither Meow nor Brex responded. Nic Corpora, a spokesperson for Mercury, stated that the company maintains close cooperation with partner banks "to ensure that both parties have consistent risk preferences, so that after accepting clients, they can provide long-term support in the best way."

During the presidency of a president who appointed regulatory officials to support the development of encryption and promised to end the so-called "Strangulation Action 2.0", this risk seems distant. But what about after Trump leaves office?

"From a risk management perspective, it is not wise for companies like ours to rely solely on accounts from American fintech companies," McIntyre said. "The government has changed, and the interpretation of the law has also changed, but the text of the law itself has not changed."