Some of the world’s largest banks have been reluctant to do business with companies operating in the cryptoasset industry, mainly due to the persistent concern that an under-regulated industry may expose the bank to unnecessary risk.
As such, crypto industry companies across the globe have suffered terribly over the last decade with the unilateral closure of their banking services, from Singapore to South Africa and Israel to India.
A major part of the problem is those banks’ inability or unwillingness to devote extensive effort and resources to building out teams focused on expensive and time-consuming compliance in what is an ever shifting regulatory landscape.
But there are countries who are starting to take the cryptobanking lead.
In Europe, that is Germany and Switzerland. The former is the world’s fourth-largest economy and home to 1,000 more financial institutions than any other EU state. The latter has one of the world’s most highly developed banking networks, and has become the headquarters for scores of blockchain and cryptoasset pioneers including Facebook’s Libra Association and the Ethereum Foundation.
Recent moves from legislators and regulators in these two neighbouring countries point to a supportive atmosphere for crypto wealth management.
For example, a 29 November amendment to the EU’s fourth anti-money laundering directive passed by the Bundesrat Federal Council gives German financial institutions the legal right to custody and sell cryptocurrencies.
This move by the upper house of the country’s Parliament gives Germany’s 1,900 banks a potential new source of income, just at the time when the country is seeking a way to stave off long-feared recession.
Any bank which applies in writing to the securities regulator BaFin will be handed a provisional license to legally handle cryptoassets. Full licenses will come into force at the end of November 2020.
Across the Alps in Switzerland, two relative newcomers have kickstarted the cryptobanking revolution.
Both SEBA and Sygnum are staffed by former bankers who made their names in legacy institutions. The lead member of Sygnum’s anti-money laundering committee, Chua Kim Leng, spent two decades overseeing the licensing and supervision of banks at the Singaporean securities regulator, while SEBA is chaired by Andreas Amschwand, the former UBS head of foreign exchange and money markets.
Both BaFin and FINMA have put themselves squarely at the forefront of banking innovation, showing a willingness to offer the kind of support and regulatory clarity that has allowed the cryptocurrency industry to grow under their close supervision.
While the UK’s market regulator the FCA has shown some willingness to involve itself in the tricky work of regulating cryptoassets, the UK has fallen behind its central European competitors in this regard.
Retail crypto investors in the UK will recognise the following situation, even in these relatively enlightened times. You send funds to an exchange, like Coinbase, Binance or Kraken. Your bank immediately contacts you asking if in fact you made this purchase or your bank card has been stolen and your account is now in the hands of criminals.
[Writer’s note: My bank, Natwest, locks my account and sends me an ‘urgent’ SMS message every time I deposit money with any crypto-exchange.]
Suspicion of cryptocurrency remains rife in mainstream UK banking architecture even as we approach 2020.
According to Crypto Buyers Club, several outlets like Capital One, Lloyds and Virgin Money have explicitly banned users from buying cryptocurrencies with their credit cards, while the picture is mixed across the sector as to whether debit cards and bank transfers are allowed, or simply tolerated.
A survey by self-regulatory body CryptoUK in August 2019 found that three quarters of British cryptocurrency businesses are forced to bank overseas, chiefly because of the difficulties in engaging local banks to do business with them. No business can survive with the threat of having their banking services withdrawn without notice.
A majority of the surveyed firms had applied for a UK bank account and been rejected, with 50% saying no reason or justification was given at the time.
App-based digital-only challenger banks are not immune, either, while they sort out their various regulatory structures.
Research by Accenture suggests that challenger banks like Revolut, Tide, Starling and Monzo will hoover up 35 million customers in the next 12 months, with FTSE 100-listed UK high street banks like Barclays and Lloyds due to grow by less than 1% in 2020.
But of the challenger options, only Revolut allows users to buy, sell and hold cryptocurrencies directly in its app.
Anecdotally, users report that Starling has banned Coinbase and does not support cryptocurrencies at all, while Monzo support has confirmed it allows only ‘sensible’ buying and selling of cryptocurrency.
So while more and more UK retail banking users are turning away from the high street and towards more fintech-friendly competition, there are still pain points with buying and storing cryptocurrency in challenger bank accounts.
US investors too are having to turn to foreign cryptobanking options because of the hostility they face domestically.
London-headquartered Cashaa recently announced it was launching US dollar bank accounts for the thousands of North American cryptocurrency firms unable to find quality banking solutions.
And 3 December saw Berlin-headquarted cryptobanking startup Bitwala roll out its CryptoTax USA programme
This allows US taxpayers, both corporate and retail, to import data from 20+ exchanges to simplify tax reporting to the IRS. This kind of infrastructure is in short supply Stateside.
Research by CryptoSlate has highlighted the appalling state of cryptobanking in the US.
At Chase Bank and Wells Fargo, the first and fourth-largest US banks, the message is clear: business accounts that relate to cryptocurrency are prohibited.
US Bancorp, America’s fifth largest institution, is similarly hostile. “Opening a personal account that interacts with a cryptocurrency exchange would mark the account as ‘high risk’ and at ‘substantial’ risk of being closed,” the report found. Businesses involving mining, media or marketing Bitcoin cannot open an account with US Bank.
Similar policies were discovered at Bank of America, with workers reportedly trained to flag accounts as ‘high-risk’ if they encounter certain keywords, including: cryptocurrency, Bitcoin, Ethereum, blockchain or virtual currency.
That means smaller fintech and private banks who have dedicated specialists and resources with expertise to crypto compliance are leading the field.
Silvergate Bank, which reportedly serves 750 institutions with banking and crypto custody services, IPO’d on the New York Stock Exchange in November.
The US capital is also home to two other major cryptobanking pioneers. The first is Metropolitan Bank and the second is Signature Bank, which has 31 private client offices spread across New York, California and Connecticut.
With a net income just over half a billion dollars a year, Signature is one of the larger operations to focus on providing crypto custody management services to an underserved area of the market. A Coindesk article in February 2019 described how the full-service commercial operation would offer cryptobanking facilities to startups in Bermuda, while CEO and Chairman Joseph DePaolo trumpeted Signet, the bank’s proprietary real-time internal blockchain payments system.
It has taken considerable foresight for these banks to come to the aid of institutions seeking fintech-friendly crypto services, but the desire, and the market, is clearly there.
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