In 2018, the UK’s Financial Conduct Authority (FCA) wrote to the heads of the country’s biggest banks to stress the importance of due diligence when it comes to crypto businesses. This appears to have led to high-risk ratings and widespread bans on crypto-related banking services, affecting both crypto firms hoping to operate in the UK and investors.
Banks are understandably and responsibly concerned about scams, but the current situation creates uncertainty. Crypto investors must be able to move their money the way they want, and crypto businesses must have access to it at the pay rails for various other reasons, such as staff and supplier compensation.
A catch-22 that harms market competition
By prohibiting crypto companies from accessing “traditional” banking services, organizations are forced to use payment service providers (PSPs), which are considered riskier by banks because they are also used by the gaming industry. There is a lack of nuance in this process, with banks tending to block transactions through PSPs.
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When it comes to specific services like payment processing, refusing to serve crypto also hurts market competition. There is a feeling that banks are hesitant to eliminate crypto risk and facilitate crypto-banking payments, as they feel it cannibalizes their own market. If this is true, then the regulator must intervene to maintain competition in the market.
Restrict individual freedoms
Economic calculations of banks’ risk-reward ratio mean they continue to dive into offering banking services to crypto-asset service providers, but those relationships are strained. Take, for example, Barclays providing faster payment services to Coinbase, which ended abruptly after three months. It is likely that the risk was deemed too great in exchange for the reward amount of funds.
Increasingly, banks are blocking crypto payments entirely or triggering their fraud prevention processes where customers are called to verify that transactions are being made with an understanding of the “risks”. It is an attack on the freedom of ordinary people to do whatever they want with their finances, and the risk weighting given to crypto-related transactions is simply not justified.
The banks contradict each other
Although crypto firms find it difficult to open bank accounts and investors’ freedoms are curtailed, it is significant interest in crypto from almost all major banks. But that’s only one side of the bank. They’re looking to see if crypto will work from an institutional investment perspective, but that will and knowledge doesn’t make it across the building for people banking — retail and corporate. You can’t have your cake and eat it too: adopting crypto as a form of institutional investing will be hampered by the same issues. Banks exhibit a short-sightedness that fails to translate interest in one area into meaningful processes in others, harming all aspects.
BCB, Revolut, Clear Junction and ClearBank all offer banking relationships or UK bank accounts for those involved in crypto. The fact that a limited number of PSPs are able to work with crypto firms or investors without significant penalties from regulators, greater exposure to risk than other organizations, and with compliance teams comparable to major retail banks shows that it is possible. Banks fail to see the magnitude of this opportunity – an opportunity already successfully exploited by a few organizations – to create a more competitive landscape.
Related: CFTC Action Shows Why Crypto Developers Should Prepare to Leave the US
Organizations that have minority transactions in crypto are also being unfairly punished by banks’ perception of crypto. This is where crypto represents a small proportion of their business, which would otherwise likely be endorsed by retail banks, but they are forced to find new ways to access banking and payment services, alongside natives of crypto. By misunderstanding the diversity of the cryptosphere, accounting and legal firms involved in crypto, no matter how small, are subject to the same general prohibitions as wallets and exchanges.
Transparency of risk rating will help, as will government intervention
We need government intervention, and we need it now. Adoption is growing and crypto isn’t going anywhere. And more, MP John Glen, then Economic Secretary, suggested in April that there was an ambition for the UK to “lead the way” on crypto and blockchain. The current state of affairs between UK banks, crypto companies and crypto investors runs counter to this ambition and poses the biggest challenge to thriving in this new economy.
In addition to emphasizing the importance of due diligence, the 2018 FCA letter to banks also states that they have a responsibility to hone their staff with the knowledge and expertise to be able to assess the risks of crypto activities. . This does not happen. On the payments side, there has been little evidence of improved skills or attempts to understand crypto and therefore more accurately assess risk. Instead, they opted for a blanket ban like the gambling industry based on industry standard classification codes.
The FCA stepped in and offered licenses to crypto organizations, provided they could demonstrate Anti-Money Laundering and Know Your Customer process to be able to operate and transact in the UK – so there needs to be effective banking relationships to enable this.
The crypto industry is here to stay and eager to grow, in line with the ambition of the government. But the biggest challenge to this growth comes from banks refusing to serve crypto businesses or investors. Without urgent intervention to expose decision-making and force support for banking relationships, UK crypto participants are forced to use limited banking services through PSPs or rethink their UK headquarters. This is bad news for everyone.
Ian Taylor is the Executive Director of CryptoUK, an independent industry body for the UK digital asset industry.
This article is for general informational purposes and is not intended to be and should not be considered legal or investment advice. The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
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