Helping crypto start-ups RYSE
Despite this year’s ups and downs, 2022 is still on track to becoming another record year for venture capital (VC) crypto funding. In terms of deal count, it is already the most active year and by Q2, total funding remained well above all years prior to 2021[1]. Even though funding slowed down in Q3, crypto start-ups still received a whopping USD 19.9 bn by the end of the quarter, 41 percent higher than last year’s quarterly close and only USD 1.3 bn less than last year’s total[2].
These investments will no doubt provide a lifeline for riding out the ongoing crypto winter. However, as the crypto market continues to grow and mature, crypto companies will need the support that goes beyond funding to thrive in the next bull market.
Unique challenges for crypto start-ups
Linking crypto services to traditional financial infrastructure has always been a challenge for crypto start-ups. This is because many of them do not qualify for corporate banking from traditional banks as they are often seen as high-risk. As such, they have found it difficult to obtain access to adequate banking and payment processing services, which may further complicate matters such as fundraising and slow business growth in a fast-growing market.
In recent years, banks and financial institutions have become increasingly more open to crypto, but gaining access to its infrastructure remains an issue for many crypto start-ups.
For instance, the UK is a jurisdiction that prides itself on being a global fintech innovation hub, but nearly half of its banks do not support crypto-affiliated transactions[3].
This often means that fast-growing crypto companies are unable to open a corporate bank account, preventing them from performing business-critical operations or accessing essential services such as treasury and payroll support, international remittances or credit. This may limit many crypto companies to conduct their operations at scale, if at all.
Lack of adequate banking support creates risks
In fact, excluding crypto companies from the banking ecosystem makes the industry far riskier and less secure. If crypto companies cannot operate within reputable and established jurisdictions, they are more likely to turn to weak jurisdictions and open their accounts offshore.
Their high-risk status also means they lack access to traditional capital and thus may rely on crypto-based third parties within the broader crypto ecosystem. A few crypto-backed venture firms have also taken advantage of this need, and not exactly with the best of intentions.
Some crypto funding entities have operated as shadow banks for crypto start-ups, which can lead to even greater counterparty risks. This is especially the case when funding rounds are financed by uncollateralised cryptos.
A great example is FTX Ventures, the VC arm of the now-defunct crypto exchange, FTX, which underlines just how great these risks can be. Many crypto start-ups had to store their assets on the FTX platform[4], effectively treating it as a bank. As part of the venture deal, FTX allegedly paid these companies high yields, furnishing them with both funding and a surrogate payment infrastructure.
When FTX filed for bankruptcy, that arrangement turned out to be catastrophic. The bankruptcy proceedings revealed that the company syphoned its customer funds from the exchange to its sister company and trading firm, Alameda Research.
At present, the crypto exchange may have more than one million unsecured creditors, at least some of which are the crypto start-ups that used the exchange as their surrogate bank.
Sygnum RYSEs to the challenge
Unfortunately, FTX was not an isolated case. This year, we have seen several other crypto players collapse on accounts of bad management, no regulatory oversight, risky business practices and even outright fraud. However, renewed calls for stringent regulation may not be the exact answer needed; too much regulation could cripple innovation, while too little could increase the risk of abuse.
This is why crypto companies, now more than ever, should be turning to trusted innovation hubs who are 1) operating in a mature and regulated environment and 2) focusing on helping crypto companies stay compliant without stifling innovation.
Strong, crypto-friendly jurisdictions like Switzerland can provide crypto companies with a strong legal base. As regulatory clarity has long been established and with clear ground rules for crypto investing, law reforms[5] and progressive engagement at the federal level, Switzerland has one of the most advanced, crypto-inclusive, financial market infrastructures to date[6].
While attractive for crypto start-ups, they still need to demonstrate that they are aware of the rules and regulations and, more importantly, have installed the right measures to enforce them (such as sound KYC, AML, and risk assessments).
That said, trusted hubs can provide the necessary regulatory guardrails and best practices to support them. As regulatory developments take shape, these hubs are becoming vital in stabilising and future-proofing the growing crypto ecosystem.
In October, Sygnum launched RYSE, a growth-oriented innovative hub that provides crypto start-ups with access to corporate banking services. The three main service pillars are:
Corporate banking: Access to both fiat and crypto corporate banking services to enable crypto firms to pay staff, manage suppliers, borrow funds and provide tax information. This also includes treasury management and ecosystem governance.
Compliance: Access to end-to-end fundraising with compliant KYC/AML support. This also includes immediate institutional-grade custody solutions for both fiat and crypto assets raised in the funding rounds. This takes away the burden of managing these processes from founders and lets them focus on building out their products.
Community: Access to Sygnum’s ecosystem of blockchain pioneers, technologies and thought leaders. This includes matchmaking with VCs, legal teams and security auditors as well as access to Sygnum’s media channels for public exposure.
Sygnum RYSE is an initiative designed to foster innovation in the crypto community by supporting crypto companies with vital infrastructure critical to their success. By enabling crypto start-ups to build in the industry’s fast-moving markets, we are confident that RYSE participants will be well-equipped with the tools needed to build, accelerate and scale successfully.
Learn more about RYSE here:
[1] Pulse of Fintech H1’22, page 24, KPMG, September, 2022.
[2] Slowing crypto startup funding may still surpass 2021 record, Reuters, December 8, 2022.
[3] Crypto Friendly Banks in the UK, Finder, November 11, 2022.
[4] FTX Investigating Possible Hack Hours After Bankruptcy Filing, The New York Times, November 12, 2022.
[5] Swiss Law Reforms Make Crypto Respectable Swissinfo, Swissinfo, September 10, 2022.
[6] Switzerland officially ushers in new blockchain finance era, Swissinfo, February 1, 2022.
Disclaimer
This document was prepared by Sygnum Bank AG. This document may contain forward looking statements and may be subject to change. The opinions expressed herein are those of Sygnum Pte Ltd, its affiliates, and partners at the time of writing. The document is for informational purposes only and contains general material. It is for use by the recipient only. It does not constitute any advice or recommendation, an offer or invitation by or on behalf of Sygnum Pte Ltd to purchase or sell assets or securities. It is not intended to be used as a general guide to investing, and should be used for informational purposes only. When making an investment decision, you should either conduct your own research and analysis or seek advice from an expert to make a calculated decision. The information and analyses contained in this document have been compiled from sources believed to be reliable. However, Sygnum Pte Ltd makes no representation as to its reliability or completeness and disclaims all liability for losses arising from the use of this information.