Cryptocurrencies and banks – a tale of insurmountable differences?

One of the most searched combinations on Google is “opening bank accounts for cryptocurrency” and “crypto bank account” with over 139 and 167 million results respectively. Despite the growing demand, the relationship between traditional banks and cryptocurrency business remains taboo. It is often portrayed by the media and regulators as two incompatible worlds because from the smallest start-ups to the biggest digital asset exchange platforms, they all repeatedly encounter the issue of opening and managing a traditional bank account, whether it’s with an off-shore banking provider or a well-known multi-national organisation.

With such a complex legal and regulatory area with jurisdictional specificities, our blockchain and cryptocurrency specialists Mariya Lazarova and Allan Murray explore some of the reasons behind the antagonistic nature of the relationship between cryptocurrency businesses and banks, share tips on overcoming banking difficulties, and cover recent developments of the issue in this article.

Banks vs Crypto

Banks have naturally shied away from providing services and opening bank accounts for crypto-dealing businesses and there are a few reasons for this:

• lots of regulatory uncertainty;
• legislative bans;
• negative media portrayal and overall stigmatisation;
• AML and KYC concerns;
• lack of proper staff training on dealing with and understanding the crypto-sphere;
• a lack of resources to deal with all of the above;
• public image concerns;
• difficulties of finding and partnering with “crypto-friendly” corresponding banks; and
• concerns that serving the needs of decentralized assets and entities is an actual threat to the centralized banking system.

Underpinning all these reasons though is a basic failure by banks to really understand this very specific sub-type of customer, who they are, how they operate and what their business needs are.

Responding to the opposition

Not all banks are the same and some will be friendlier than others. There are some practical steps that can be taken when thinking about opening a bank account as a business or a person dealing with cryptocurrencies and digital assets:

1. Target crypto-friendly institutions. This is in no way an endorsement but locations such as Hong Kong, Singapore, the Bahamas, the Netherlands, Liechtenstein and Switzerland have a better reputation;
2. Do your own detailed due diligence on your bank of choice and do not just assume the legitimacy of its services. While crypto banking is an attractive area for smaller and more flexible players, vigilance is always key;
3. Expect more extensive AML and KYC checks and factor in the increased time that will be required in providing your responses;
4. Be prepared to back-up and answer every enquiry;
5. Patience is a virtue – the bigger the size of your business, the more customers from different jurisdictions it will cover and the more difficulties you may experience;
6. This should go without saying, but be honest about the nature of your activities. It may be tempting to define an activity as an “IT business” or a “tech trading” (which arguably captures the crypto-sphere) but this presents long-term risks and potential liabilities, both civil and criminal; and
7. Finally, be realistic about the unfortunate possibility of rejection.

Are things changing?

The current situation is to some extent a vicious circle: crypto businesses want to grow and move forward but if they are denied basic banking rights, this can then result in creative and not always successful attempts to overcome the restrictions they face, which then lowers those businesses’ reputations, which means that they continue to be denied basic banking access and so on. But there are projects underway deliberately addressing this state of affairs, such as Knabu, who are building a fiat clearing bank for the crypto community.

But a global shift in attitude from restriction and stigma to flexibility and appreciation needs to happen for the sector to thrive. Recently there have been some positive changes: in May 2020, Coinbase and Gemini were added to the list of clients at JPMorgan Chase. At the end of June 2020, ING became the first bank to have taken part in developing a protocol (the “TRP”) for tracking crypto transactions, which is compatible with FATF standards. ING’s protocol has also been backed by Standard Chartered Bank.

The way forward

Banking difficulties not only suffocate the growth of crypto and financial institutions alike but they also slow down and disincentivize the development of an adequate regulatory regime. The more banks welcome lawful crypto clients, the higher and clearer relevant security and regulatory standards will become, turning a vicious circle into a virtuous one. Serving the banking needs of the crypto-sphere is a field of growing opportunities, and those institutions who are willing to explore it now may benefit the most among their peers in the long-term.

If you require legal assistance, contentious and/or transactional, in the field of blockchain, cryptocurrencies and digital assets, please contact our Senior Associate Allan Murray via email on allan.murray@ilaw.co.uk or our Trainee Solicitor Mariya Lazarova at mariya.lazarova@ilaw.co.uk.

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