Payments to and from the largest cryptocurrency exchanges like Coinbase are being blocked by several high-street banks in the United Kingdom. But what are the motivations behind the crypto crackdown?
New currencies and tokens have been introduced into the cryptocurrency market almost every day in recent years. Despite its rising popularity, the regulatory framework for cryptocurrencies is unclear.
Banks are in a precarious position as they attempt to navigate this new market while staying on the right side of the law due to this ambiguity.
How this nascent business does in 2024 depends on whether or whether banks change their minds and welcome crypto back in from the cold.
Rise of crypto: How banks are responding to crypto in 2024 — The UK situation
The attitude taken by UK banks ranges from entirely excluding customers from engaging in bitcoin trading to just making it much more difficult.
Many retail bank clients are upset because certain financial institutions have begun prohibiting money transfers to exchanges and even prohibiting withdrawals from exchanges into banks.
This prevents users from withdrawing their assets from exchanges like Binance and Coinbase (COIN), forcing them to locate one of the few remaining banks that support cryptocurrencies in order to convert their holdings into fiat currency.
1. Cautiousness
Despite 1.75 billion people using mobile banking by 2024, according to Statista, banks' wariness of the emerging cryptocurrency industry may be attributable to the level of risk they are willing to accept.
We’ve, for example, seen the banning of crypto ATMs on the UK high-street. Banks need to weigh the costs and benefits of letting their customers transact with groups that could exploit their customers' funds for illegal or unethical purposes.
Regulations in the conventional financial system are stringent because they have evolved in response to widespread instances of consumer harm and unlawful behaviour.
Damage to consumers occurs when they incur financial losses as a result of being duped by dishonest business tactics. When it comes to client harm, retail banks may be fined millions of pounds.
High street banks just need to examine the circumstances behind the FTX cryptocurrency exchange's collapse to see that the dangers involved are not worth the potential rewards.
Most professionals in the business agree that the cryptocurrency sector is seeing developments that are different from the norm for regulated and permitted financial services. Black market trades, terrorist funding, market manipulation, money laundering, and similar topics get a lot of press.
Conventionally regulated and licenced financial institutions must have audit, risk, and compliance committees. One issue these groups consider is whether or not “the things that we are allowing to occur” put customers at risk of financial loss or violate any regulations.
There may be a reluctance on the part of many crypto-sector actors to pose these concerns to themselves.
2. Slow adoption overall
Let's have a look at how some of the largest banks in the UK have reacted to the fallout from the FTX exchange's demise in November 2022.
Due to an uptick in scams involving some cryptocurrency exchanges after the demise of the FTX exchange, UK high-street bank NatWest (NWG.L) has taken measures to either prohibit payments or limit the amount you may transfer daily to certain organisations, until further notice.
NatWest has resolved to take adequate measures to ensure the security of our clients. This doesn't mean we'll completely shut down cryptocurrency transactions, but we will limit funding to the cryptocurrency exchanges with the greatest potential for monetary damage.
These UK financial institutions take the toughest stance against cryptocurrency:
The cryptocurrency exchange market is the latest to be deemed “high risk” and “heavily used for criminal purposes” by a major financial institution.
Lloyds has said that they will no longer accept credit card payments for cryptocurrency; nevertheless, you may use a debit card to make cryptocurrency purchases or send money to a cryptocurrency exchange at your own discretion and risk.
Revolut and Monzo are two examples that continue to accept cryptocurrency. Monzo has announced that its customers have access to a number of cryptocurrency exchanges for making bitcoin purchases as part of their personal banking with the company.
And Nationwide Bank, which is more accurately described as a building society than a bank, has taken a generally favourable stance towards dealing in cryptocurrencies. Your debit card may be used to purchase cryptocurrency, send funds to an exchange, or withdraw funds from an exchange to your regular bank account.
The sole limitation is that you can't move money to Binance since that exchange has been blacklisted by the Financial Conduct Authority (FCA).
3. Lagging infrastructure in local communities
Sure, consumers are accustomed to things like open banking and integrated accounting software. Nevertheless, there are lots of unanswered questions. It's possible that crypto will outperform everything else, or fail terribly.
All banks have their beginnings in local communities, but now many institutional banks operate more like consumer-goods manufacturers than financial institutions. Furthermore, many banks publicly celebrate their intention to shut down branches, which has a chilling effect on their capacity to foster a feeling of community.
While the potential for blockchain technology to shake up the financial services sector is the primary subject of this DeFi article, the danger posed by “crypto” extends well beyond the novelty of the underlying technology.
What we have learned from researching crypto so far is that the technology is responsible for the emergence of numerous new groups that are proving to be quite effective at bringing people together online.
Although social media has accomplished this, it remains tough to pin down specific organisations that advocate for or defend the underlying platforms upon which they are built.
However, in the crypto space, there is a dedicated community of users for every major cryptocurrency and NFT, including Bitcoin, Ethereum, Solana, Bored Apes, CryptoPunks, and Vee Friends.
Therefore, tokens are being used to build highly linked virtual communities, much to how people split into tribes in the “real world” with things like sports teams, politics, and religion.
Sales of digital items are ripe to be woven into the fabric of the digital community, and many more advantages are expected to become accessible to the community as time goes on and these new communities are developed.
That's why we think banks should learn as much as they can about the experiences customers are having with cryptocurrencies and return to their community banking origins, which emphasised building strong bonds between customers and bank employees.
Companies that focus only on product sales without fostering any kind of community among their customers will find it difficult to stand out in the market. Bank executives' mindsets need to change from seeing communities as a place to find cost savings to returning to their historical role as the community's unifying force.
Rise of crypto: How banks are responding — Major trends in the US and UK
Financial institutions are still putting money into blockchain initiatives despite regulatory concerns. Some financial institutions are developing their own cryptocurrencies, while others are teaming up with other firms to provide digital crypto wallets and other services.
In what ways are banks using blockchain?
Blockchain technology might be used by a bank to build a digital record of all internal transactions. This has the potential to increase safety while decreasing fraud. In addition, the bank can bypass using typical payment processors and provide novel services like peer-to-peer payments and remittances.
Do blockchains have any advantages for financial institutions?
Banks may gain a lot by adopting blockchain technology. For instance, it may facilitate cheaper operations by cutting down on the number of middlemen between firms and consumers. If all transactions are documented precisely and permanently, it might also aid in preventing fraud.
1. Custody services (with examples)
One of the first large Wall Street banks to make such a declaration was Bank of New York Mellon, which said in February 2021 that it will store, transfer, and issue bitcoin on behalf of its asset management customers. Expect the release sometime later in the year.
BNY Mellon's crypto wallets, developed in collaboration with crypto infrastructure firm Fireblocks, will allow customers to store bitcoin and ether, the two biggest cryptocurrencies.
Bitcoin custody services were launched in October by U.S. Bancorp (USB.N). The bank has hired NYDIG, a Bitcoin firm, to serve as a sub-custodian. Institutional money managers are the target audience for these services. read on
In March, State Street Corp (STT.N) announced its intention to provide cryptocurrency custody services in conjunction with crypto infrastructure platform Copper.co, with the caveat that the offering is contingent upon regulatory clearance.
Meanwhile, in a 2020 study issued by the World Economic Forum, Deutsche Bank (DBKGn.DE) secretly disclosed intentions to build a service to keep and trade cryptocurrencies for institutional investors, noting that it had already produced a proof of concept.
Also in 2020, BNP Paribas (BNPPY.UL) and cryptocurrency wallet service Curv completed a proof of concept on a safe way to transfer tokenized assets. The company said the change was a milestone on the road to developing a unified system for the safekeeping of both physical and digital assets.
In 2023, Reuters requested an update on the status of these projects, but neither Deutsche Bank nor BNPP was able to offer one.
2. Financial planning (with examples)
In 2021, several large banks, started providing cryptocurrency exposure to their wealth management customers, led by Morgan Stanley (MS.N). In March, CNBC reported that customers with at least $2 million in assets at Morgan Stanley may get access to three bitcoin funds. read on
According to Business Insider, beginning in July, financial advisors at JPMorgan Chase & Co (JPM.N) were authorized to take orders to purchase or sell five different cryptocurrencies on behalf of the bank's wealth management customers. read on
State Street and Wells Fargo & Co (WFC.N) both started providing cryptocurrency exposure to high-net-worth customers in the summer of 2021. In August, JP Morgan and Wells Fargo partnered with NYDIG to establish private bitcoin funds.
Media outlets have reported more recently, the wealth management division of Citigroup Inc. (C.N) established a digital assets group to help clients invest in digital currencies such as cryptocurrencies, stablecoins, non-fungible tokens, and digital currencies issued by central banks.
According to filings made with the Securities and Exchange Commission, cryptocurrency firm Galaxy Digital is providing Goldman Sachs's (GS.N) ultra-wealthy customers with access to an ethereum fund.
3. Trading (with examples)
Automation and robo-advice are nothing new. After putting its cryptocurrency trading desk to rest in 2019, Goldman relaunched it in March 2021. The Global Markets department of the bank offers its customers a derivative called bitcoin futures and nondeliverable forwards, which they may use to speculate on the cryptocurrency's future price.
Together with Galaxy Digital, a cryptocurrency-centric asset management, Goldman Sachs took things a step further, becoming the first major U.S. bank to conduct an OTC crypto exchange.
According to CoinDesk's reporting, Bank of America (BAC.N) authorised trading of bitcoin futures for certain customers through a cooperation with CME Group Inc (CME.O) in July 2021. Although it released a statement saying it was “currently considering strategies related to cryptocurrency and other digital assets”, Bank of America refused to comment on the claim.
Citigroup said a while back that it was exploring allowing some institutional customers to trade bitcoin futures. However, media reports indicated that the company was waiting for regulatory permission. read on There was no quick response from Citi. According to IFR, Citi just approved its first CME Group bitcoin futures deal.
Also awaiting the green light from authorities to provide cryptocurrency trading is PNC Financial Services Group (PNC.N).
Future of crypto integration in banking
Can we know what is ahead?
Some government officials and watchdog groups are becoming more concerned that criminals are exploiting vulnerabilities in cryptocurrencies. However, transactions conducted in DeFi are subject to greater scrutiny than those conducted in TradFi (Traditional Finance).
Lack of understanding on what precisely crypto will be used for in the long run seems to be the most popular reason from bank managements against crypto at this time.
The fact that the crypto ecosystem is still in its infancy may be the key to unlocking its potential. It's not reasonable to expect a one-year-old to have any concept of the future when they're born. Since Satoshi Nakamoto mined the first bitcoin on January 3, 2009, the cryptocurrency sector is barely a teenager.
Although the internet was created in the 1960s, it wasn't until the 1990s that commercial uses of the internet took off.
It was unimaginable that thirty years later, the internet would be used routinely for online shopping at Amazon, that three billion people would be connected online via social media platforms, that people would start picking up strangers in their car via services like Uber, or that people would start renting out their homes via services like Airbnb.
When it comes to banking, despite the adoption of Open Banking, we consider crypto-friendly financial institutions to be “early adopters” who will benefit from being at the table when centralised and decentralised financial systems eventually meet.
Even while many more financial institutions need to catch up to this new technology, it's encouraging to see pioneers like DBS launching their own cryptocurrency exchange. Signature Bank, New York Community Bank, Customers Bank, and Western Alliance Bank are just a few examples of US financial institutions that have used blockchain technology.
Because of the current boom in funding for DeFi initiatives, the total market value of DeFi cryptos and locked-in assets has risen beyond $100 billion. Since these financial institutions have a front-row seat to the inevitable upheaval that cryptocurrencies and DeFi will bring, we believe they will be able to surf the wave rather than be swept away by it.
As Web 3.0 (a decentralised and better version of the internet) begins to take shape, we anticipate that these financial institutions may emerge as the ultimate winners.
How banks are responding to the rise of crypto: The Verdict
We’ve seen news of Paypal integrating digital crypto wallets and bull-runs that excited the space. Not all regional banks are waiting to see what happens before acting in response to the potential danger posed by decentralised finance.
It’s a complicated space. But Silvergate Bank and Signature Bank, two of the most crypto-forward financial institutions, are already providing deposit accounts, real-time payments capabilities, and other banking services including crypto-backed loans to cryptocurrency exchanges, cryptocurrency investors, and cryptocurrency entrepreneurs.
Tassat (blockchain-based payments platform) allows Signature, Customers Bank, and Western Alliance to utilise their private blockchain, allowing their customers to transfer instantaneous U.S. dollar payments to each other.
There is no need to worry about anti-money-laundering and know-your-customer regulations because to the “Walled garden” approach used by major financial institutions; only their customers may utilise this payment method.
While at now only one bank's clients may transfer money to another bank's customers in US dollars, this technology may eventually allow for interoperability across banks.
Signature and Silvergate, two of the most forward-thinking crypto banks, provide crypto-backed loan products to their institutional customers. These products aim to address a common complaint among cryptocurrency investors: a dearth of leverage.
Regional banks such as Signature and Signature have already responded with loan products that allow institutional clients to use their cryptocurrencies as collateral for a loan, while DeFi introduced crypto investors with the ability to post their crypto assets as collateral to receive a loan in other cryptocurrencies or stablecoins.
Time is not on the side of the banking sector, as DeFi developers, protocols, and companies are pressing forward with their objective to replace conventional financial institutions like regional banks.
Although many financial institutions' upper echelons are still sceptical of the potential disruption posed by DeFi and blockchain technology, established names like Visa are making serious moves to integrate themselves into the cryptocurrency sector.
While we don't anticipate all US and UK regional banks to follow DBS's lead, we do urge them to do so in order to benefit from the development of Web 3.0 and reduce the not insignificant danger of disruption.
See our top UK crypto-friendly banks.
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