UK banks hate crypto and that’s bad news for everyone

In 2018, the UK’s Financial Conduct Authority (FCA) wrote to the heads of the country’s biggest high street banks to stress the importance of due diligence when dealing with crypto businesses. It appears to have led to widespread high-risk assessments and bans on crypto-related banking, affecting both crypto businesses hoping to operate in the UK and investors.

Banks are understandably and responsibly concerned about fraud, but the current situation creates uncertainty. Crypto investors need to be able to move their money around as they please, and crypto businesses need access to payment rails for a number of other reasons, such as paying employees and suppliers.

A catch-22 that harms market competition

By preventing crypto businesses from accessing “mainstream” banking services, organizations are forced to use payment service providers (PSPs), which are considered higher risk by banks because they are also used by the gambling industry. There is a lack of nuance in this process, with banks tending to block transactions through PSPs.

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In the case of specific services such as payment processing, refusing to serve crypto also harms market competition. There is a sense that banks are reluctant to debase crypto and make crypto-to-bank payments easier because they feel it cannibalizes their own market. If that is true, the regulator must step in to maintain market competition.

Restriction of individual freedoms

Banks’ financial risk-reward calculations mean they continue to dip their toes into providing banking services to crypto-asset providers, but these conditions are fraught. Take for example Barclays offering faster payment services to Coinbase, which ended after three months. It is likely that the risk was considered too great in return for the reward of the amount.

Increasingly, banks are blocking crypto payments altogether or triggering their fraud prevention processes where customers are called to confirm that transactions have been made with an understanding of the “risk”. It is a violation of ordinary people’s freedom to do what they want with their finances, and the risk weighting given to crypto-related transactions is simply not justified.

The banks contradict themselves

Although crypto companies struggle to open bank accounts and investors get limited freedom, it is there is significant interest in crypto from almost all high street banks. But that’s only on one side of the bank. They’re looking at whether crypto will work from an institutional investment standpoint, but that willingness and knowledge doesn’t reach across the edifice to people who do transaction banking – retail and corporate. You can’t have your cake and eat it too: Crypto adoption as a form of institutional investment will be hampered by the same issues. Banks display a short-sightedness that fails to translate interest in one area into meaningful processes across 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 businesses or investors without significant sanctions from regulators, a greater risk exposure than other organizations and with comparable compliance teams to large retail banks shows that it is possible. Banks are failing to see the magnitude of this opportunity – one that has already been successfully exploited by a few organizations – to create a more competitive landscape.

Related: CFTC action shows why crypto developers should get ready to leave the US

Organizations that have minority trades in crypto are also unfairly penalized by banks’ perception of crypto. This is where crypto represents a small portion of their business, which would otherwise likely be risk-approved by the retail banks, but they are forced to find new ways to access banking and payment services, along with cryptonatives. Misunderstanding the diversity of the cryptosphere, accounting and law firms with involvement in crypto, no matter how small, are subject to the same general prohibitions as wallets and exchanges.

Transparency in risk assessments will help, as will government intervention

We need government intervention, and we need it now. Adoption is growing, and crypto is not going anywhere. And even more than that, MP John Glen, the then economic secretary, hinted in April that there was an ambition for the UK to “lead the way” in crypto and blockchain. The current situation between UK banks, crypto companies and crypto investors flies in the face of this ambition and is the single biggest challenge to flourishing in this new economy.

As well as stressing the importance of due diligence, the FCA’s 2018 letter to banks also says they have a responsibility to train their staff with the knowledge and skills to carry out risk assessments of crypto businesses. It hasn’t happened. On the payments side, there has been little evidence of upgrading or any attempt to understand crypto and therefore more accurately assess risk. Instead, they have gone for a blanket ban along the lines of the gambling industry based on standard industry classification codes.

The FCA has stepped in and offered licenses to crypto organizations, provided they can demonstrate Anti-Money Laundering and Know Your Customer processes to be able to operate and trade in the UK – so there must be effective banking relationships to enable that.

The crypto industry is here to stay and eager to grow, in line with the government’s ambitions. But the single biggest challenge to this growth comes from banks that refuse to serve either crypto businesses or investors. Without urgent intervention to expose decision-making and force support for banking relationships, UK crypto participants are forced to either use limited banking services through PSPs or rethink being based in the UK. That’s bad news for everyone.

This article is for general information purposes and is not intended to be and should not be taken as 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.