Crypto Banking in Europe & Rest of the World Needs to Adapt in the Wake of Change

@ulriklykke

Author of the Bitcoin Global Macro, a newsletter focusing...

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Following the collapse of the FTX exchange and other major crypto-oriented firms such as BlockFi and Voyager Digital, crypto companies and users are facing challenging times in accessing banking services. 

Challenging Times for Crypto Banking

The first quarter of 2023 exposed cracks in the global banking sector, resulting in the downfall of three crypto-friendly banks in the US: Silicon Valley Bank (SVB), Signature, and Silvergate Bank. It is worth noting that the collapse of SVB is the largest bank failure since the financial crisis of 2008.

While the collapse of these banks cannot be primarily attributed to them offering crypto services, US regulators seem to have taken this as an opportunity for an all-out war against the crypto industry. This includes traditional financial service providers that offer on and off-ramping services to the crypto sector.

In particular, US regulators led by the Federal Reserve recently warned banks of the impending liquidity risks associated with offering banking services to the crypto industry. 

“The events of the past year have been marked by significant volatility and the exposure of vulnerabilities in the crypto-asset sector. These events highlight a number of key risks associated with crypto-assets and crypto-asset sector participants that banking organizations should be aware of.” partly read the joint statement. 

This stance has caused a change in sentiment, with more banks shying away from crypto. According to an article by Reuters, JP Morgan is currently not onboarding crypto-related businesses, while the Bank of New York Mellon is implementing a "very, very rigid" approach and vetting crypto companies seeking their services on a case-by-case basis.

Traditional Banks' Fear of Crypto: Regulation or Competition?

While the absence of regulatory frameworks certainly plays a significant role in hindering traditional banks from offering crypto services, it begs the question whether these legacy financial institutions are genuinely cautious or simply fearful of disruption by crypto.

Back in 2017, JP Morgan Chase CEO Jamie Dimon famously dismissed Bitcoin as being worse than the tulip bubble of the 17th century. However, in a surprising turn of events, JP Morgan is now among the banks actively exploring crypto, even executing their first DeFi trade on a public blockchain in 2022.

What's even more intriguing is that players in traditional finance are gradually reaching a consensus that blockchain and cryptocurrencies possess the potential to disrupt the $7 trillion global banking sector. This disruption is already happening through the disintermediation of vital banking services, including payments, loans, and tokenized securities, among others.

In certain regions, such as Latin America and Africa, where crypto adoption rates are notably high, individuals are progressively forsaking the traditional banking sector in favour of crypto transactions. The latest crypto adoption report by Chainalysis revealed that over 50% of the top 20 countries in crypto adoption are middle or lower-income economies.

Moreover, banks are understandably wary of cryptocurrencies due to their limited expertise in evaluating risk-return profiles associated with crypto investments. Additionally, the complexities of maintaining compliance with regulatory authorities while operating in a regulatory gray area that entails significant risks only further compound their concerns.

Seeking Alternatives for Crypto Banking Solutions 

On the brighter side, crypto companies and users have not been completely left out in the cold. There are several alternatives for banking solutions that are emerging as viable options for those currently in search of reliable banking partners. Most notably, changing countries to more crypto-friendly jurisdictions or seeking banking services from more flexible financial service providers, particularly in the Fintech niche.

Switching Jurisdictions

As you may have already figured out, the US is perhaps not the most crypto-friendly country in terms of operations. Fortunately for the crypto industry, there are several jurisdictions where regulatory frameworks have already been established to oversee crypto activities and the provision of financial services to entities and individuals operating in this ecosystem.

Just recently, the European Union approved the Markets in Crypto Assets (MiCA) regulation, which sets a clearer regulatory framework for the use of cryptocurrencies. But more importantly, this newly adopted regulation opens up the market for crypto banking services in Europe, which already has a significant advantage with over 55 crypto-friendly banks.

Meanwhile, in Hong Kong, where a licensing regime for crypto exchanges began in June 2023, the Hong Kong Monetary Authority (HKMA) is reportedly exerting pressure on major banks such as Standard Chartered and HSBC to extend their banking services to crypto exchanges.

Of course, these two jurisdictions are just a few examples of where crypto companies and users can migrate to. When it comes to regulatory frameworks, there are several other alternatives, including El Salvador, where Bitcoin is legal tender, as well as South Korea and Singapore.

Fintech Banks 

The rise of "challenger" banks in recent years has undoubtedly been a game-changer in modern-day businesses. According to statistics by Fortunly, the asset base of Fintech banks has grown by over 105% within the past decade, while traditional banks witnessed a 75% growth over the same period.

But what is particularly noteworthy about this digital-first banking sector is the flexibility it offers. Most jurisdictions have less stringent regulatory requirements for Fintech banks compared to their traditional counterparts. Therefore, this is another option that crypto users are exploring for banking solutions across different parts of the world.

One of the Fintechs that has stood out as a banking alternative is Stripe, the Irish-American financial services-focused company. They recently launched a fiat-to-crypto on-ramp in December 2022, allowing customers to directly acquire crypto assets without necessarily going through a bank for purchases.

In Europe, the emergence of Neobanks such as Peanuds is making it easier than ever before for crypto startups to access banking services. This nascent Fintech offers a comprehensive crypto-friendly banking solution coupled with innovative features, including both SEPA and SWIFT transfers, and the ability to handle multiple currencies.

With alternative banking services being offered by Fintechs, it has become much easier to alleviate the banking pain points currently experienced by both individuals and companies in the crypto industry.

The Future of Crypto Banking 

So, where is the future of crypto banking headed? Will regulators establish the much-needed frameworks, and if they do, will traditional banks embrace crypto? The answers to both questions are still uncertain, but what's clear is that regulators across the world are willing to implement proper oversight frameworks. As for banks extending their services, it will likely depend on the agility and business models of different traditional banks.

That said, there is also a possibility that over time, Decentralized Finance (DeFi) will rise to the challenge and provide its much-touted decentralized services on a larger scale. 

Until that is the case, the best opportunities that companies in the space are left with are banking providers that understand how to structure an offering besides jurisdictional and compliance barriers.

Also published here.