4 Solutions For Closed Bank Accounts By Crypto Withdrawals

As the power and control of money shift away from traditional institutions, banks are desperately attempting to resist the inevitable changes. An increasing number of instances have emerged where banks are closing the accounts of users who engage in cryptocurrency transactions. Especially in the regulatory hellscape US.

So how can you avoid getting your US bank accounts closed while directly interacting with crypto? Don’t worry, we got your back! But first things first. Why do banks close accounts?

Why Do Banks Close Accounts?

Banks close accounts for various reasons, primarily due to the surge in fraudulent activity, which has significantly increased.

To counter this, some financial institutions are adopting stricter measures by closely scrutinizing customer transactions and taking necessary actions. It includes account closures when deemed appropriate.

One of the reasons behind this stringent approach is the obligation of financial institutions to report any unexplainable suspicious or irregular behavior through Suspicious Activity Reports (SARs) to regulatory bodies and law enforcement agencies. Failing to report such suspicious activity can lead to penalties for the banks and their compliance employees if they discover problematic transactions later.

The Bank Policy Institute, an organization representing mid- and large-size banks, highlights that the incentives are now towards closing accounts as a preventive measure against potential issues. In 2021, financial institutions collectively filed 1.4 million SARs, marking a significant 70% increase from the numbers recorded in 2014.

Surprisingly, a 2018 study by the Bank Policy Institute examined 16 million alerts and revealed that only about 4% of the 640,000 suspicious activity reports warranted law enforcement follow-up. This finding suggests that many customers flagged in these reports are likely innocent of wrongdoing.

Moreover, financial institutions operate under the watchful eye of the Financial Crimes Enforcement Network (FinCEN) of the Treasury Department, making them accountable for handling potential financial crimes.

It’s essential to be aware that banks possess the authority to close a customer’s account at any time and for any reason, a fact typically buried within the fine print of customer agreements. But, what is the reason behind banks’ hostility towards crypto?

Why Are Banks Waging War Against Crypto?

Initially, banking regulators seemed open to crypto activities, with the Office of the Comptroller of the Currency allowing banks to hold cryptocurrencies for customers in 2020.

However, the situation changed after the FTX meltdown. In January, three major banking regulators expressed concerns about their ties to the crypto industry, citing “significant safety and soundness concerns” and questioning the feasibility of safely banking the sector.

Due to the regulatory crackdowns, banks are now distancing themselves from crypto companies fearing the potential severing of digital currencies from the traditional financial system. Banking regulators are particularly wary of dealing with crypto clients, given the aggressive pursuit of larger players in the industry by the SEC.

Consequently, many banks are reevaluating their involvement with the crypto sector, and some that had previously dabbled in crypto are reducing their exposure or cutting ties altogether. Even banks that initially kept their distance from cryptocurrencies are now more determined to avoid any association, resorting to closing accounts and avoiding customers potentially linked to the crypto industry.

A Decentralized Threat to Banks

This shift in approach is driven by regulators’ realization that cryptocurrencies, especially Bitcoin, are here to stay and challenge the traditional monetary system. Governments and major organizations worldwide, including banks, are investing heavily in exploring how to utilize and control decentralized trust technologies like blockchain.

The core issue lies in that banks have enjoyed centuries of unchallenged dominance in the financial landscape. However, the rise of Bitcoin and blockchain tech is disrupting this status quo, as it enables direct peer-to-peer exchanges without the need for a central intermediary. This decentralization significantly challenges traditional financial institutions’ power and control over money. However, there are some initiatives that are trying to merge traditional finance with DeFi:

Similar to how new techs have rendered old ones obsolete, the emergence of crypto is putting banks on the brink of irrelevance, leading them to react with the support of government authority.

Despite the attempts of state-backed regulations to exert control, progress seems unstoppable, and banks have legitimate reasons to feel uneasy about the future as blockchain continues to disrupt the financial landscape.

The Current Landscape

Throughout the year, regulators and the White House have warned banks, urging them to minimize their exposure to cryptocurrencies.

In late January, the Federal Reserve dealt a blow to Custodia, a state-chartered bank offering crypto custody services. It denied its application to join the Federal Reserve System and open a master account, enabling it to compete with larger national banks.

In response, the most prominent names in the crypto industry and numerous smaller players turned to two crypto-friendly institutions: Silvergate and Signature. However, Silvergate faced difficulties following the collapse of FTX and its sister company Alameda Research, both of which were clients. It led to massive customer withdrawals, and the bank subsequently announced it’s winding down on March 8th.

Signature’s situation differed, as it had been trying to diversify its customer base since December to mitigate the concentration risk experienced by Silvergate. Nevertheless, panic triggered by the failure of Silicon Valley Bank (SVB) and the perceived reputation of Signature as a crypto bank led to a fatal run on deposits. Consequently, the FDIC took possession of the bank on March 12.

Amidst these events, Barney Frank, a Signature board member and former congressman who played a crucial role in US banking reforms after the 2008 financial crisis, asserted in an interview with Bloomberg that the bank could have survived if regulators had not aimed to discourage involvement with crypto.

Before Silvergate and Signature

Even before Silvergate and Signature’s closures, crypto community members, including the CEO of US crypto exchange Kraken, suspected a conspiracy dubbed “Operation Choke Point 2.0.”

The term parallels a program launched during the Obama administration, where US officials allegedly pressured banks to sever ties with “undesirable” industries, such as pornography and payday lending.

Supporters of the Choke Point 2.0 theory argue that these recent actions represent a covert attempt to regulate the crypto sector, exerting influence over the banking system to implement de facto policies without requiring congressional approval. As a result, many banks fear serving crypto, making the policy successful without an explicit ban or new laws.

Some Republican senators, led by Bill Hagerty of Tennessee, voiced their concern about this coordinated behavior in a letter to banking regulators on March 9, suggesting parallels to Operation Choke Point.

These regulatory statements have caused banks to reconsider their involvement with the crypto sector, adding to the sense of a banking crisis faced by the crypto industry in the US- whether unintentional or orchestrated.

On July 13, Coinbase CEO Brian Armstrong took to Twitter, addressing his 1.2 million followers and inquiring about any instances of Coinbase customers who are also clients of Bank of America experiencing account closures due to their transactions with the exchange.

Of the respondents to Armstrong’s query, 19.3% answered with a “no” to indicate they hadn’t faced such issues. However, a staggering 9% responded “yes,” suggesting that approximately 1,200 people (based on the 13,746 respondents at the time of the question) had encountered account closures by Bank of America due to their activities on Coinbase.

This tweet by Armstrong comes in the wake of a similar incident where Muneeb Ali, co-creator of the Bitcoin layer-2 platform Stacks, shared on Twitter that his personal Bank of America account had been closed without any explanation. Although Ali believes the closure resulted from transactions he made through the account to buy and sell Bitcoin on Coinbase, the bank gave no specific reason.

Numerous other individuals have also expressed their frustration on Twitter regarding sudden account closures at Bank of America in recent weeks. However, it’s worth noting that these closures were not necessarily linked solely to their cryptocurrency-related activities.

So, How To Bypass These Hurdles?

It’s advisable to refrain from directly withdrawing your cryptocurrency as fiat currency from CEXs using their payment gateways to avoid potential issues. Such transactions are prone to attracting scrutiny from banks and may raise red flags.

While exploring these alternatives, it is crucial to consider local regulations, tax implications, and security aspects associated with each method. Remember that some options may involve higher fees or require additional verification steps to comply with AML and KYC regulations.

Best P2P Platforms

Let’s briefly explore some of the top P2P platforms on the scene.

1. BitValve

BitValve is a P2P exchange that allows individuals worldwide to buy and sell their cryptocurrencies, including Bitcoin, Ethereum, Litecoin, and more, using a wide range of payment methods like Bank Transfer, PayPal, or Western Union.

  • Best for users in countries with strict crypto regulations
  • Supports 16 cryptocurrencies, including meme coins like Shiba Inu and Dogecoin
  • 0.8% (fiat) or 0.35% (crypto-only) charge for the person posting the offer
  • Available in the United States.

2. Paxful

Paxful is a fully peer-to-peer platform with an intuitive UI and a user base exceeding 12 million.

  • A specialist peer-to-peer exchange.
  • Supports three cryptocurrencies: Bitcoin, USD Coin, and Tether.
  • Over 350+ payment methods, including Apple Pay, PayPal, M-Pesa, Venmo, local bank transfers, Skrill, etc.
  • Accepts gift cards from 130+ merchants like Amazon, iTunes, eBay, and Steam.
  • No fees for buyers; sellers pay 1% of the transaction amount.
  • Available in the United States.

3. LocalCoinSwap

LocalCoinSwap is a highly favored non-custodial cryptocurrency marketplace that facilitates the purchase of bitcoin and trading of various popular cryptocurrencies with fellow traders from across the globe.

  • Supports 20+ digital assets, including Bitcoin, Ethereum, Tether, USD Coin, DAI, BNB, BUSD, and Tron.
  • 300+ payment types, such as Yandex, WebMoney, YooMoney, WeChat Pay, SEPA, SWIFT, PayID, Interac, IMPS, etc.
  • Standard P2P trades are fee-free; trades from posted ads cost up to 1%.
  • Fully-fledged rating system with reviews.
  • Available in the United States

2. OTC Trading

Over-the-counter (OTC) trading, is a method primarily favored by institutions and high-volume traders, for exchanging large volumes of cryptocurrencies.

Following the decline of FTX in November, there has been a consistent rise in demand for OTC services. This heightened demand can be attributed to the collapse of several crypto lenders last year and, more recently, the SEC’s lawsuit against Binance.

Minimum Trade Size
Coinbase Prime –
Kraken $100,000
Crypto.com $50,000
FalconX –
Genesis Global Trading $250,000

 

Platforms such as Coinbase Prime, Kraken, FalconX, Crypto.com,  Genesis Global Trading, etc., provide OTC trading options for US users. Also, these platforms cater to traders seeking larger-scale and more discreet cryptocurrency transactions.

3. Crypto ATMs

You can use websites like CoinATMRadars, Bitcoin.com, etc., to find the nearest crypto ATMs. Some of the well-known operators that run these crypto ATMs include

These operators offer convenient access to cryptocurrencies and enable users to convert cash into digital assets or vice versa at ATM locations.

4. Gift Cards

You can use websites like CryptoRefills, Coingate, Bitrefill, etc., to purchase gift cards and top-ups. These websites offer a selection of gift cards usable on popular services such as Amazon, eBay, Walmart, and more. Overall, they offer the convenience of using cryptocurrencies to acquire gift cards and add credit to various services and accounts.

Conclusion

As Web 3 continues gaining momentum, traditional financial institutions are taking cautious measures to address potential risks. Exploring alternative methods for interacting with cryptocurrencies is essential to avoid the risk of having your bank account closed.

Utilizing peer-to-peer platforms, OTC trading, crypto ATMs, or crypto gift cards can offer more discreet and secure avenues for converting crypto to fiat and vice versa. However, it is vital to remain aware of local regulations, tax implications, and AML and KYC guidelines. DYOR!

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