Are Banks universally against cryptocurrencies? A comprehensive article to help you understand the attitudes of banks around the world.

Traditional banking has often been seen as the antithesis of Bitcoin (BTC), an industry that decentralization seeks to disrupt. Interestingly, many banks are finding themselves in urgent need of the attributes and infrastructure that cryptocurrencies provide, especially in blockchain technology.

Traditional Banking's Stance

More and more cryptocurrency banks are emerging, providing alternatives to existing systems and offering storage solutions for this emerging asset class. However, these new institutions still face significant barriers—regulatory uncertainty.

Regulatory uncertainty is prevalent in the field of cryptocurrency banking because the industry is still relatively new, lacking a comprehensive regulatory framework, not to mention a tendency for traditional regulatory bodies to be resistant to change.

Nevertheless, some regulatory authorities demonstrate forward-thinking and innovation, such as the Swiss Financial Market Supervisory Authority (FINMA).

According to a report on August 26th, FINMA recently issued banking licenses to two cryptocurrency banks. This precedent allows newly approved entities to bypass the necessity of "finding willing traditional bank participants." Cryptocurrency banks SEBA and Sygnum are now under regulation, just like any other financial institution. The significance of this for the cryptocurrency industry was expressed by SEBA's CEO, Guido Buehler:

This shows that regulators are taking this topic seriously. The ice has been broken, and services related to digital and traditional assets can now be discussed in a strict regulatory framework. This will drive the blockchain industry and allow existing and new companies to create new value and business.

Development of Crypto Banks in the U.S.

In the U.S., "crypto banks" serve as safe havens for cryptocurrencies. Pioneers like Coinbase and more recent entrants like Fidelity Digital Assets seem more like quasi-banks. Coinbase Custody, on the other hand, operates in a very gray area, not meeting the regulatory standards of traditional banking institutions, yet falling under the jurisdiction of the New York Department of Financial Services (NYDFS).

Interestingly, cryptocurrency regulation is an area NYDFS is actively seeking to change. As early as July, the agency established a new division dedicated to researching and innovating in financial technology. This developing division of NYDFS will be responsible for licensing and supervising crypto assets and their corresponding institutions. Superintendent Linda Lacewell highlighted the importance of this innovative regulatory expansion in a statement:

As innovation in banking, insurance, and regulatory technology continues to grow, the financial services regulatory environment must evolve and adapt.

Opposing Views

However, not all regulatory bodies share this stance. When the German Federal Financial Supervisory Authority (BaFin) spoke to its German banking regulator, Cointelegraph, it mentioned:

The emerging industry needs to comply with existing rules and standards. We believe sustainable financial innovation needs to be able to comply with these rules. A widely followed concept of technology-neutral regulation has sufficient flexibility. If there is a need for regulatory changes, this will be done by the legislators.

An example of regulatory adaptation is the much-criticized BitLicence, a form of regulating the purchase, sale, and issuance of cryptocurrencies. However, when this form faced challenges in New York, it was often attributed to early exits by cryptocurrency companies like Bitfinex, BitMEX, and Kraken, as these firms temporarily halted operations in New York upon its introduction.

Thus, during a 2018 parliamentary hearing, BitLicence was cited in evidence submitted to the Treasury Committee as an "extreme example of ineffective cryptocurrency regulation" (source).

Even in Malta, the self-proclaimed "Blockchain Island" known for its industry-friendly policies, cryptocurrency startups face challenges in obtaining financial services due to lax regulation. According to a report by The Times of Malta, companies are being turned away by banks that do not have a "risk appetite." Financial services are instead reserved for those fully regulated by the Malta Financial Services Authority (MFSA), a process that may take up to six months for initial responses.

Former CEO of the Agricultural Bank, Roderick Psaila, is seeking to address this issue by applying to the MFSA for a credit institution license. If approved, the license would allow a range of financial activities, including leasing, payment services, currency brokerage, and custodial services.

A New Dawn for Banking

Cryptocurrencies are inherently global, thus not subject to the same legal or territorial restrictions as fiat currencies. From its inception to date, which is approximately a decade, the public has begun to accept this revolutionary concept. Take Facebook's Libra, for example, aiming to disrupt the existing financial system, or at least create its own internal cashless economy.

However, as early as July, U.S. President Trump shared his views on Libra via Twitter, suggesting that if Facebook wants to become a world bank, they must seek a new banking charter. Similarly, the EU's antitrust regulatory body is currently investigating potential anti-competitive behaviors by Facebook.

Essentially, Facebook is attempting to create an evolved version of Bitcoin, but this time around, governments and banks worldwide have already begun to stir. With the support of blockchain technology, the reality of controlling digital assets that underpin the financial system is becoming a growing trend.

In its current form, cryptocurrency bank regulation is still nascent, merely an extension of the concept of cryptocurrencies from legacy systems. If a future for cryptocurrency banks does indeed exist, then Facebook's regulatory precedent will inevitably serve as its foundation.

However, to achieve this goal, these regulations must be sufficiently flexible to allow for the flourishing of this innovation rather than stifling it, and must be appropriately tailored to meet the current standards of the traditional banking industry.

Further Reading

• Study: Exchanges Still Exaggerate Trading Volumes
• Unknown Mining Pool Close to 50% Threatening Bitcoin Cash

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