A small Pennsylvania bank has emerged as one of the biggest partners for the crypto industry — albeit a somewhat reluctant one.
(Bloomberg) — A small Pennsylvania bank has emerged as one of the biggest partners for the crypto industry — albeit a somewhat reluctant one.
Customers Bancorp Inc. partners with hundreds of digital-asset firms, including major exchanges, market makers and stablecoin issuers, according to people with knowledge of the matter. It attracted new clients after crypto-friendly lenders Silvergate Capital Corp. and Signature Bank collapsed, leaving Customers Bank — the West Reading-based company’s primary subsidiary — one of a few facilitators of dollar transactions that crypto businesses could turn to.
The lender, ranked the 81st-largest US bank by assets, is now at the forefront of an industry battered by blowups, scrutinized by regulators and shunned by mainstream lenders — a very different spot from almost two years ago, when Bitcoin was at a record high and investors were piling in. Back then, Customers Bank Chief Executive Officer Sam Sidhu touted his firm’s crypto ambitions. Today, the bank is putting a cap on crypto-related deposits and Sidhu says the assets are just one small piece of a broader plan to expand the bank’s payments business.
Crypto “provides a very good use case for us to prove our tech capabilities” for payments, Sidhu said in an interview. But Customers “will be focused on the types of industries that generate us stronger and deeper customer relationships.”
The bank operates a payments platform that enables crypto clients to move dollars with the same immediacy as crypto — 24 hours a day, seven days a week. Silvergate, which announced plans in March to wind down, and Signature, seized by regulators the same month, offered similar capabilities. Their closures — which came as depositors yanked money from small lenders amid this year’s regional-bank turmoil — left Customers with little competition providing such services, said Piper Sandler analyst Frank Schiraldi.
“With Signature and Silvergate basically shutting their doors, these balances had to go somewhere,” he said. Customers Bank “really seems to be the last man standing.”
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Customers Bank’s growing appeal to crypto businesses was also helped by the fact that it dodged the industry’s biggest crisis of the past year: the implosion of Sam Bankman-Fried’s FTX exchange. Unlike Silvergate and Signature, Customers didn’t count his firm among its clients.
So when FTX’s ties to Silvergate and Signature, along with the broader regional bank turmoil, helped lead to the demise of the two lenders, Customers saw an influx of new clients racing to open replacement accounts.
Crypto Clients
A portion of those clients came from the crypto sector, said the people with knowledge of the matter, asking not to be identified discussing private information. Other clients came from the technology, venture and fund-finance sectors, and the bank’s staff worked around the clock as it re-purposed workers from other departments to help these teams with due diligence and the client on-boarding process, the people said.
“Our folks have created a factory line where we are opening up accounts at a fever pitch,” Sidhu said in a March interview, without referring to crypto clients specifically.
But now, with the crypto market a shadow of its former self, Customers is downplaying its connections to an industry it once embraced. The company decided to limit deposits on its Customers Bank Instant Token real-time payments platform, or CBIT, which caters to crypto clients, to no more than 15% of its total.
Deposits for CBIT held steady at about $2.25 billion at the end of the first quarter, accounting for 13% of its $17.7 billion total. That increased from $1.85 billion in mid November, following FTX’s collapse. Only a small portion of the new deposits that Customers Bank received in the aftermath of the regional-banking tumult were from new CBIT clients, a spokesman said. The bank has no loans to any customers in the crypto space.
Sidhu also points out that the largest drivers of deposits in the past three months weren’t crypto clients but fund finance, tech and venture. On the bank’s recent earnings calls, management has stopped talking up its crypto business. A webpage offering information about the payments platform has been removed.
That hasn’t stopped the bank from doing business with some of the industry’s biggest names. Circle Internet Financial, the stablecoin giant that issues USD Coin, uses Customers’ payments platform to process US dollars associated with the creation and redemption of its stablecoin. That in turn drives many of Circle’s clients to join Customers’ platform, creating a so-called network effect — the more companies that join the platform, the more attractive and useful it becomes.
Other Customers clients include the biggest US crypto exchange, Coinbase Global Inc., as well as stablecoin issuer Paxos Trust Co., trading firm GSR and custodians Anchorage Digital and BitGo.
Super Community
It’s a notable position for a firm that bills itself as a “super community” bank, with its headquarters in West Reading, a borough about 60 miles (97 kilometers) northwest of Philadelphia with about 4,500 people. Jay Sidhu — CEO of parent company Customers Bancorp, and Sam Sidhu’s father — led the digital-banking push for Customers Bank, including, among other initiatives, an effort about two years ago to attract crypto clients.
Jay Sidhu, 71, has long been opportunistic during times of turmoil. During the US savings and loan crisis of the 1980s, he ran Sovereign Bancorp and expanded the firm by buying troubled bank branches and turning them around. In 2009, he became CEO of Customers Bank, known at the time as New Century Bank, a troubled lender with just $250 million of assets. Now, it has more than $21 billion.
In 2020, Customers Bank hired Sam Sidhu, then working in private equity. The 39-year-old Sam Sidhu became CEO of Customers Bank in mid-2021.
When Silicon Valley Bank collapsed in March following a run on deposits, Customers explored a deal for all or part of the failed lender, Bloomberg News reported that month. In June, Customers purchased $631 million of Signature Bank loans, snapping up the assets at a steep discount. As part of the deal, it also added nearly 30 bankers who had worked on the financing.
“People probably just lumped them in as a community bank, but they are clearly very different,” said Schiraldi of Piper Sandler. The company, he said, has ventured into businesses larger banks tend to be in.
Regulator Attention
Customers Bank’s larger crypto role could bring additional attention from regulators, who are clamping down after warning banks earlier this year of the risks of doing business with the industry, said Alma Angotti, a partner at the consulting firm Guidehouse and a former enforcer with the US Securities and Exchange Commission and Treasury Department.
“The banking regulators would be looking at how well the bank is controlling the risk,” she said. “Do they have the sophistication and the strong control to understand the risk of a particular crypto business?”
Customers believes it has measures in place to manage risk. For one, the bank holds CBIT deposits in US currency, as opposed to investing them in securities or loans, allowing it to expeditiously meet any withdrawal demands.
Customers also spreads large deposits among multiple banks, a service called insured cash sweep that’s become more common since the regional-bank upheaval began. The approach helps its depositors maximize Federal Deposit Insurance Corp. coverage, given the standard $250,000 cap on FDIC-insured deposits.
Representatives from the FDIC, the Federal Reserve and the Office of the Comptroller of the Currency declined to comment on Customers Bank’s crypto business.
Even with Customers stepping up, the crypto industry’s banking problem still persists, especially for less established players, said Diogo Monica, co-founder of Anchorage Digital, a crypto custodian.
“I’m really hoping that there are more alternatives,” he said, “and that there are more fiat banks that actually support crypto players.”
–With assistance from Katanga Johnson and Bre Bradham.
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