Swiss cryptocurrency bank FlowBank declared bankrupt by local financial regulator, did cryptocurrency cause trouble?

As a partner of the stablecoin TrueUSD (TUSD) and the exchange Binance, the Swiss Financial Market Supervisory Authority (FINMA) yesterday forced the cryptocurrency bank FlowBank into bankruptcy proceedings, citing serious violations of the minimum capital requirements for operating a bank, excessive debts, and almost no possibility of restructuring.

FlowBank Forced to Close by Swiss Financial Regulator: High-Risk Business Causes Trouble

The Swiss Financial Market Supervisory Authority (FINMA) announced in a recent statement that it has initiated bankruptcy proceedings for the crypto bank FlowBank on June 13, citing insufficient funds to sustain the bank's operations.

FINMA stated that FlowBank was unable to meet the capital requirements and lacked prospects for restructuring, raising concerns that the bank may not be able to cover its liabilities:

We found that FlowBank seriously violated regulatory requirements, particularly in terms of capital requirements, organizational structure, and risk management.

The bank established many high-risk business relationships and processed large transactions without a comprehensive assessment.

FlowBank reportedly holds around $760 million in assets and has over 22,000 users.

Priority Repayment for Users with Deposits Below 100,000 Swiss Francs, What About Cryptocurrencies?

Additionally, FlowBank stated on its website that users with deposits below 100,000 Swiss Francs, approximately $111,000, will be protected and will receive priority repayment within 7 working days.

FINMA emphasized in the statement that the bank's existing funds would fully reimburse these users, so the Swiss bank deposit insurance scheme esisuisse would not be involved in assisting.

However, some are concerned that the liquidation of cryptocurrency assets for some users may prove to be challenging:

FINMA claims that whether cryptocurrencies can be treated as custodial assets akin to securities and included in the bankruptcy process will depend on the liquidator.

Longstanding Partners with TUSD and Binance

FlowBank, as a bank heavily invested by cryptocurrency asset management company CoinShares, has been providing cryptocurrency trading services for years.

The bank is known to be the partner bank for the controversial stablecoin TrueUSD TUSD, issued by Techteryx, and reportedly provides custody services for cryptocurrencies to Binance.

Can bank deposits be used as collateral for futures? Bloomberg: Binance is currently negotiating with local Swiss banks

Are Cryptocurrencies Really to Blame?

Founded in 2020, FlowBank was put on FINMA's watchlist after just a year for violating regulatory requirements and engaging in many high-risk businesses. The institution appointed an independent auditor to monitor its compliance processes and financial activities, but violations were still found over the past two years.

In March of this year, FINMA finally ordered the revocation of FlowBank's license, but news of its bankruptcy surfaced during the waiting period for the decision to take effect.

However, are cryptocurrencies really the cause of trouble in the so-called "high-risk business"? Perhaps, fundamentally speaking, it may not be wrong in terms of the nature of financial products, but improper portfolio allocation and changes in interest rate policies could lead to financial crises for traditional banks, crypto banks, or exchanges alike.

In March last year, the U.S. faced the collapse of three banks, Silvergate, Silicon Valley Bank (SVB), and Signature Bank, within a month, demonstrating that if traditional financial institutions handle asset management improperly, the risk of a run or bankruptcy still exists.

In-Depth Analysis: How does the collapse of Credit Suisse differ from SVB? How can exchanges do better than traditional banks?