While Governments Are Slow to Regulate, The World’s Banks Tighten on Crypto

The world saw a massive uptick in cryptocurrency regulation near the end of 2017.  Governments everywhere moved swiftly to find ways to protect citizens and gain revenue–with mixed results.  

In countries with ineffective regulation, some banks have taken their own steps toward regulating their customers’ interactions with cryptocurrency. The decisions to block or restrict interaction with cryptocurrency or cryptocurrency-begotten fiat seems to come from several sources, depending on the situation and the location.

In any case, banks’ decisions to act independently to limit or block their customers’ access to crypto-related funds or services is important for several reasons.

Of course, the most problematic result of these swift decisions is often that customers suddenly find themselves without a way to access their funds or with no way to deposit their crypto-funds into their accounts.

Additionally, crypto exchanges, crypto hedge funds, and other crypto-related companies who rely on these banks are often forced to halt their operations as a result of these decisions, leaving their investors high and dry.

For banks themselves, the decision to voluntarily lock themselves out of the fast-growing cryptocurrency financial sector could present them with a serious disadvantage in the future. While many financial industry “big wigs” continue to write off cryptocurrency as nothing more than a fad or “something that will end badly,” banks who do not find a way to healthfully interact with crypto could find themselves outpaced by banks who do.

On the other hand, some wariness in the approach to cryptocurrency is a necessary measure. In the best-case scenarios, banks and financial institutions are finding ways to take a balanced approach toward the interaction with and regulation of cryptocurrencies.  

Speaking to CNBC, senior advisor at the Digital Currency Initiative at MIT Media Lab Michael Casey said that some caution is healthy. “There’s a necessary caution that regulators are taking on: Not wanting to kill the technology, but on the other hand, trying to protect the financial system, protect people from this.”

Casey went on to say that some institutional investors–namely, hedge funds–could find the unregulated and volatile nature of cryptocurrency “attractive.”

For Some Financial Institutions, Crypto and Crime are Just Too Close–Take a Look at the UK

It’s not a secret that many of the world’s larger banks and existing financial system regard cryptocurrency as something of a threat. Some banks decry crypto as nothing but a tool used purely for money-laundering, funding terrorism, and buying drugs off of the darknet; they refuse to interact with something so “dirty.”

Indeed, in a report by the Financial Times, the UK-based Building Societies Association said that the unregulated nature of cryptocurrencies “puts them into the highest risk category in relation to money laundering. In addition, it is well known that such currencies are popular with criminals, who use them to launder the proceeds of crime.”

The Building Societies Associations’ remarks seem to be part of a trend of denial of mortgages to customers in the UK who’ve raised money with crypto.

Bitcoinist reported that House and Holiday Home Mortgage Broker Mark Stallard said that he was denied loans for a client from several lenders: “I do not believe the mortgage providers in general are ready for this issue and research tells me that a lot more people will be knocking on our doors with funds made or raised in this fashion.”

Additionally, the Royal Bank of Scotland recently informed crypto firms based in Gibraltar that it will “no longer process transactions connected to firms dealing with cryptocurrencies,” according to News.Bitcoin.com.

Some Banks Feel Threatened by Crypto–But They Must Adapt

If banks are not so concerned about the association of cryptocurrency with illicit activities, then they may be very concerned with the threat that cryptocurrencies pose in the way of taking power out of the hands of big banks and giving it back to individuals.

In a report for Brave New Coin, Chair of the European Networking Forum Chris Skinner wrote that a crypto-phobic view could be detrimental for banks in the long run.  Skinner writes that banks have managed to stay as integral a part of societies because of their ability to adapt to changing technological cultures: “in fact, name me one bank that has failed due to technology? I cannot think of one.”  

Cryptocurrency, of course, is part of the wave of the newest financial technology that banks must find a way to adapt to.  Skinner argues that specifically, it is technology that can be used to serve people in the most underbanked regions of the world. “The new consumer financial system is the mobile wallet, and that mobile wallet is most successfully developed in parts of the world that were unbanked and underbanked,” he wrote.

Indeed, there have been several incidences of cryptocurrency being used as a financial safe haven for citizens of countries stricken by economic crisis. In mid-November, Reuters reported that individuals in Zimbabwe were turning to Bitcoin as a way to protect their investments from the rapidly-declining Zimbabwean dollar; reports of similar incidences in Venezuela circulated near the end of 2017.

Banks could use cryptocurrency and blockchain as a way to tap into this underserved market themselves.  However, it’s possible that forward-thinking blockchain startups may beat them to the punch.

Some cryptocurrencies have been developed specifically to serve underbanked individuals. OmiseGO, for example, is an eWallet platform that users can use to store funds, send cross-border remittances, and even take out loans.

India: Governmental Pressure, But No Official Regulation

In some cases, banks seem to be responding to pressure from their respective governments, although no official regulations have been put in place.

This is the case in India, where the banking industry has been forced into what News.Bitcoin.com called a “momentary financial purgatory.”  According to Quartz, pressure from the government is causing banks and payment providers to stop their dealings with cryptocurrency exchanges, essentially “choking” the exchanges out of business.

Near the end of last year, the Indian Finance Ministry issued a statement warning investors of the risks associated with cryptocurrency investment. Additionally, the statement reminded Indian residents that “the Government or any other regulator in India has not given license to any agency for working as an exchange or any other kind of intermediary for any VC [virtual currency].”

Following the Indian government’s statement, users Indian crypto exchange Koinex began experiencing delays in the withdrawal of INR (Indian rupees) from Koinex. After several weeks of issues, the exchange issued an explanation: “A tussle between our payment service partner and their bank has caused an indefinite delay in the settlement of a large portion of deposits to Koinex.”

The announcement continued that Koinex was “constrained to temporarily suspend INR withdrawals, until the differences between the payment service provider and their bank are resolved.”

Speaking anonymously to Quartz, an official from another Indian exchange facing similar issues explained that the Indian government had been “twisting the arms” of banks to get them to stop supporting customer interaction with cryptocurrency exchanges.

“The government hasn’t banned virtual currencies, but has expressed its reservation about them Our understanding, based on various meetings with our banking partners, is that this (situation) is a result of those reservations.”

Bank Indonesia Cause Crypto Exchanges to ‘Voluntarily’ Shut Down

Recently, Bank Indonesia issued a press release warning Indonesian residents warning of the risks associated with buying, selling, and using trading cryptocurrencies. The statement also reminded residents that although cryptocurrency is not illegal in Indonesia, it certainly is not “legitimate.”

In September, two Indonesian exchanges made the decision to shut down operations after Bank Indonesia announced that it would not accept Bitcoin deposits.

At the time, BI said that the decision not to accept Bitcoin was made because of the association of BTC and other cryptocurrencies with crime:

“Virtual currencies are vulnerable to bubble risks and susceptible to be used for money laundering and terrorism financing, therefore can potentially impact financial system stability and cause financial harm to society.”

Banks in the US Quietly Block Crypto Access

Two instances of banks acting to curb their users’ interactions with cryptocurrencies have been reported in the good ol’ USA.

Fortune recently reported that Metropolitan Bank told a customer that effectively immediately, the bank was “ceasing all international crypto-related wire transfers to and from” itself.  The bank’s decision is reportedly the result of an incident of one of the bank’s clients involvement in crypto-related international fraud.

The Merkle reported a similar incidence with a Capital One customer: “Capital One users who try to purchase Bitcoin or other cryptocurrencies right now will notice that their transactions are not being processed.”

The United States’ efforts toward regulating cryptocurrency have been rather lukewarm.  Each of the fifty states has its own policies regarding how cryptocurrency can be handled.  

There have not been any official federal regulations put into place with regards to cryptocurrency, although it was decided by the SEC that some tokens sold during ICOs could be officially classified as securities.  Exactly which tokens can be officially qualified as securities is determined by the Howey Test, which asks (among other things) if “any profit comes from the efforts of a promoter or third party.”

The regulatory “whack-a-mole”, as it was referred to by American entrepreneur Bradley Tusk in a report for CoinDesk, could result in a failure to effectively address the problem at all.  

Tusk described the US government’s attitude toward crypto regulation as “death by a thousand cuts;” an effort that has not been effectively led or managed by any composite force, but one that has been characterized by a series of mini-efforts to regulate crypto arising only after some sort of problem happens.

“If the US government just tries to go after each problematic example of crypto on an ad-hoc basis, [death by a thousand cuts] is exactly what will happen  (just like the [US’s] War on Drugs has been a complete and utter failure) and it’ll never get ahead of the problem,” wrote Tusk.

More of the Same in 2018?

It’s unclear if the world’s governments will be capable of organizing themselves enough to effectively regulate cryptocurrency within the year 2018. In the meantime, more incidences of banks and financial institutions taking regulatory efforts upon themselves will undoubtedly continue.

While many cryptocurrency enthusiasts argue that banks are the enemy, we can hope for a future in which cryptocurrency forces banks to serve individuals, as opposed to the other way around.