Banking is often seen as the antithesis of Bitcoin (BTC), the very industry the nascent protocol looks to defuse and disrupt. Ironically, many banks are desperately in need of the attributes and facilities afforded by cryptocurrencies — specifically blockchain, their underlying technology.
Perhaps then, it’s not too surprising that more and more cryptocurrency banks are springing up, offering an alternative to tired legacy systems and allowing room for an emerging asset class.
However, some significant hurdles remain for these emerging institutions. Regulatory uncertainties are rife within the world of cryptocurrency banking. Ill-equipped regulatory bodies often attempt to pen in budding crypto firms to a system in which the regulation doesn’t adequately fit.
Yet, there are some regulatory authorities whose forward-thinking and desire to innovate is wholly evident, with the Swiss Financial Market Supervisory Authority (FINMA) being one such institution.
FINMA recently allocated banking licenses to two cryptocurrency banks. This precedent allowed the newly sanctioned institutions to circumnavigate the necessity to find a willing traditional banking participant. The two banks in question, SEBA, and Sygnum, are now regulated, just like any other financial institution. Speaking to Cointelegraph, Guido Buehler CEO of newly sanctioned crypto bank SEBA, relayed what this means for the cryptocurrency industry going forward:
“It’s a sign that regulators are taking the topic seriously. The ice is broken — services relating to digital and traditional assets are now centrally accessible within a strict regulatory framework. This will boost the blockchain industry and allow existing and new companies to create new value and business.”
Crypto banking in the United States
The advent of regulatory acceptance toward crypto banks is setting a precedent within the cryptocurrency community, one with far-reaching consequences. However, this reach is still relatively limited. In the U.S., “crypto banks” are little more than literal safe havens for cryptocurrencies.
Cryptocurrency pioneers such as Coinbase — and more recently, Fidelity Digital Assets — appear more like quasi-banks, obfuscated by nonspecific regulation. Coinbase Custody, for example, treads a fine-line in a very grey area. It doesn’t quite fit the criteria for regulation by traditional banking authorities and instead falls under the remit of the New York Department of Financial Services (NYDFS).
Interestingly, hazy crypto regulation is an area the NYDFS is actively looking to change. Back in July, the authority created a new division, dedicated to the research and innovation of financial technologies. This developing component of the NYDFS will be “responsible for the licensing and supervising” of both crypto-assets and their institutional counterparts. A recent statement by NYDFS Superintendent Linda Lacewell urged the importance of this innovative regulatory expansion:
“The financial services regulatory landscape needs to evolve and adapt as innovation in banking, insurance, and regulatory technology continues to grow.”
However, this is not a stance held by all regulators. Speaking to Cointelegraph, Germany’s banking regulator, the Federal Financial Supervisory Authority, (BaFin), noted that instead of regulation adapting to cryptocurrencies, cryptocurrencies and their institutions should conform to existing regulation:
“The industry needs to comply with existing rules and standards. In our view, a sustainable financial innovation needs to be able to comply with these rules. The widely followed concept of technologically neutral regulation is adequately flexible. If regulatory changes will be necessary this will be done by the legislator.”
One example of regulatory adaption comes in the form of the much-maligned BitLicence, a scheme that oversees the buying, selling and issuing of cryptocurrencies. The BitLicence has a troubled past in New York. It is often blamed for the early departure of cryptocurrency companies such as Bitfinex, BitMEX, and Kraken, which all ceased operations within the state after its introduction.
Evidence submitted to a 2018 Parliamentary Treasury Committee on the regulatory approach to cryptocurrencies in the U.S. called the BitLicence “an extreme example of poorly executed regulation.”
Since then, the NYDFS has allocated some cryptocurrency companies with a more extensive banking charter. Known as a Trust Licence, the permit allows for a plethora of services that mimic those usually associated with traditional institutions, including the processing of payments, providing financial advice, the custody of assets as well as other fiduciary powers.
Coinbase Custody, which received a Trust Licence as early as 2018, is among the few crypto firms that can boast being a limited purpose trust company. More recently, Fidelity Digital Assets has also applied for a Trust License. However, this is still a far cry from accepting these companies as “banks” in the traditional sense.
Even In Malta, the tiny country that claims to be a “blockchain island” for its industry-friendly policies, crypto startups struggle to obtain financial services due to regulatory sluggishness. According to the Times of Malta, companies are being turned away by banks that do not have the “risk appetite” to support such ventures. Instead, financial services remain reserved for those that are fully regulated by the Malta Financial Services Authority (MFSA), a process that can take up to six months for a first-round response.
However, RnF Finance Limited, the brainchild of former Agribank CEO Roderick Psaila, is looking to rectify this by applying for a credit institution license with the MFSA. If granted, the permit would allow for a range of financial activities, including financial leasing, payment services, money broking, and safe custody services.
Though slow, Malta’s dynamic regulatory approach is lauded as pioneering. There is, after all, a reason why crypto companies such as Binance, OKEx, and Bittrex are flocking to this tiny island in droves. Much like FINMA, the MFSA is pioneering cryptocurrency policy, doing so within a regulatory sandbox, enabling a controlled platform upon which to conceptualize results.
Malta isn’t the only country at the forefront of innovation. Germany also boasts several companies looking to decentralize finance. The blockchain bank Bitwala is just one of these, bypassing the need for a banking license by partnering up with the regulatory-compliant SolarisBank.
This isn’t a case of subterfuge either. In order to operate within Germany, BaFin requires either a formal banking license or a partnership with an existing regulated bank. The importance of this isn’t undermined by BaFin, which told Cointelgraph about the significant concerns regulators hold regarding cryptocurrencies and their scope for Illicit activity:
“This issue is inter alia very important for BaFin that cryptocurrencies do not serve as gateway supporting money laundering and financing of terrorism. In the financial system and for the time being we have robust fallback systems which are accompanied by legal standards and effective supervision. These preconditions also have to hold true in the area of cryptocurrencies.”
A new dawn for banking
Cryptocurrencies, by their very nature, are global and therefore not confined by the same jurisdictional or geographic restrictions as fiat currency. Bitcoin, in essence, sought to provide individuals the ability to be their own bank, devoid of intermediaries and third parties.
Ten years after its inception, others are starting to cotton on to this revolutionary concept. Take Facebook’s Libra stablecoin, for example, a proposed foray into the cryptocurrency industry that aims to subvert the existing financial system — or at the very least, create its own internal, cash-free economy. In essence, the social media monolith is looking to become the world’s central bank.
While it may seem far-fetched, it could be closer to the truth than some people think. Back in May, months before Libra was unveiled, Forbes reported that Facebook CEO Mark Zuckerberg had met with the governor of the Bank of England (BoE), Mark Carney.
The meeting was undisclosed and remained that way until last week when the BoE officially recognized the meeting under a freedom of information request. Months later, in a speech during the U.S. Federal Reserve’s annual symposium, Carney opined that a Libra-like digital currency could replace the U.S. dollar as the world's reserve currency. However, as Carney continued to note, Facebook’s rise to economic domination won’t be a simple one.
Back in July, U.S. President Donald Trump tweeted out his now-notorious thoughts on Libra, suggesting that if Facebook “wants to become a bank, they must seek a new banking charter.” Similarly, the European Union’s antitrust regulators are currently pursuing Facebook over its potentially anticompetitive behavior. As such, U.S. lawmakers have called the venture to a halt until Libra satisfies regulatory due diligence.
In essence, Facebook is attempting what Bitcoin was created to accomplish — only this time, both the world’s governments and banks have pricked up their ears. The reality of a digital asset at the helm of a financial system, underpinned by blockchain technology, is becoming an ever-growing probability. In light of this, Facebook has the responsibility of being the regulatory battering ram for both cryptocurrencies and their institutional counterparts.
In its current form, crypto banking regulation is crude and ill-fitting, cut from the hand-me-downs of a bygone legacy system. If there is truly to be a future for cryptocurrency banking, Facebook’s regulatory precedent will inevitably underpin it. To work, however, this regulation will need to be malleable enough for innovation to flourish without being stifled, and appropriate enough that it satisfies the current criteria of the traditional banking sector.