Switzerland has earned a reputation as a country where the political elite favorably refers to cryptocurrency and blockchain. The canton of Zug has rightly become the world’s “cryptocurrency valley” akin to Silicon Valley in the United States. Another European nation Malta, according to the country’s Prime Minister Joseph Muscat, is also building a “blockchain state.” But, in reality, cryptocurrency businesses are unlikely to open bank accounts and use financial services in these countries. What does this mean, and what are the prospects for banks and cryptocurrencies?
Signal to All Banks in the World: Cryptocurrencies Are a Threat
On March 13, the Bank for International Settlements (BIS), which is the main institution that determines the main trends in the development of banks in the world and which almost all regulators listen to, concluded that cryptocurrencies threaten banks. But this statement looks rather strange. On the one hand, according to the BIS, credit institutions around the world have “very little involvement in the cryptocurrency world.” On the other hand, the authoritative organization located in the Swiss city of Basel essentially makes a forecast that, firstly, the cryptocurrency market will develop very quickly in the near future, and secondly, this process cannot be stopped.
It is curious that the main blow of the BIS critics was aimed at convincing their colleagues that “cryptocurrencies do not reliably provide the standard functions of money and are unsafe to rely on as a medium of exchange or store of value.” Why? One of the main arguments is that they have a decentralized nature and there is no structure behind them. At the same time, references to the riskiness of the crypto market do not stand even the slightest criticism. The most large-scale study on this matter shows that the share of criminal transactions in the total volume of transactions with Bitcoin for several years is at a level lower than 1%. This is several times less than any assessment of financial offenses that are carried out with various fiat currencies.
Banks of Switzerland and Malta Restrict Access to Their Services for Crypto Businesses
Nevertheless, the latest findings of the BIS were expected: after all, in November 2018, the Swiss regulator FINMA, based on the opinion of the BIS, recommended that banks set the reserve ratio of funds for losses in the amount of beyond the limit of 800% when working with cryptocurrency companies. In such a situation, it is not surprising that this time, the BIS voiced a position that should prevent banks from working with cryptocurrency business even more and therefore refuse to support it. And this is already observed. Daniel Haudenschild, the new head of the Swiss Crypto Valley Association, admitted that innovative entrepreneurs were faced with the inability to receive funding from banks, and in fact, no one has lobbied their interests so far.
On March 1, the official newspaper of Malta, Times of Malta, reported, citing parliamentary secretary for financial services Silvio Schembri, that “the blockchain and cryptocurrency businesses are encountering resistance when they try to open bank accounts.” The problems, no matter how ironic it sounds, began in the fall of 2018 after three laws had come into force in July that were declared as “fintech-friendly.” But, like any regulation, this is still an element of a certain bureaucracy, and as a result, two-thirds of entrepreneurs were rejected when they tried to obtain a certificate that is necessary for opening a cryptocurrency business, and without it, the doors of banks are precisely closed for them. But even with such a document, at present, “banks were politely declining their business, saying it was outside their ‘risk appetite.’”
Opening a U.S. Bank Account for a Crypto Business Is like a Miracle
The situation is not unique to these two countries. In the USA, it is now recognized that it is some kind of miracle for a fintech business to start working with a bank. Progress in the adoption of modern legislation on cryptocurrencies in individual states, such as Wyoming, does not allow us to say that they are implemented not only on paper but also in practice. The situation is similar in Hong Kong where Mark Lamb, the head of CoinFLEX, refused to make any attempts to find a common language with banks and now conducts all his operations in cryptocurrency, excluding fiat.
World Banks Do Not Intend to Leave
Curiously, such giants as HSBC and J.P. Morgan refuse to work with cryptocurrency businesses. In the first credit institution, they introduced blockchain into their work in the forex market and reduced costs by 25% and also developed a blockchain platform for Voltron financial services. J.P. Morgan, on the contrary, has a negative attitude toward Bitcoin but launched its own “cryptocurrency,” the JPM Coin. Obviously, these credit organizations are ready to accept only those elements of new financial technologies that do not threaten their existence. They do not intend to support the decentralized cryptocurrency infrastructure that is being built in parallel with them, which will eventually replace them. Real startups competing with banks in their functions, such as Revolut, face “problems in European countries” when dealing with financial institutions.
Moreover, as DeCenter wrote earlier, in the attempts of large institutional players to get as many blockchains and cryptocurrency patents as possible lies not the desire to actively use them but the desire to further limit the development of this space. In some countries, such as Chile and Brazil, banks actively oppose other branches of government, even if a decision is made in favor of starting such institutions with a cryptocurrency business.
The “doubters” are influenced from the outside. Besides the BIS, the regulator of Malta—the Financial Market Authority of this island nation—is under pressure from the IMF. The fund calls for an increase in the number of government officials, more frequent use of monetary fines for violating banks, and also “to ensure that supervisory actions are not delayed in any way, even if a legitimate appeal is filed to a court.” In addition, the political elite of Malta who supports the blockchain and cryptocurrencies were faced with unprecedented allegations of corruption voiced by the United States.
The general situation with the regulation of cryptocurrencies in the world is well described by what Sharon Goldberg, the head of Arwen, said: “It’s extremely difficult not to break the law because users always fear that they will do something wrong somewhere, but in fact, users don’t know what the rules of the game are from a legal point of view.” The vagueness of the rules is, of course, a tool to give banks a head start. According to Weiss Ratings, the statement of the BIS suggests that “banks are feeling the heat, so they start slandering and launching baseless accusations to sway public away from crypto.”
Meanwhile, the failure of the banking sector is most clearly demonstrated by the attempt of its work under sanctions. Thus, despite the availability in Russia of an alternative payment system, the National Payment Card System developed by the Bank of Russia, Mosnarbank, which came under the financial constraints of the United States, could not switch to it quickly, which resulted in blocking of Visa and MasterCard cards issued by this credit institution. In addition, the bank stopped making payments in U.S. dollars. This situation means that the modern banking system is becoming critically vulnerable to political risks, and Moscow received another signal that traditional banking is not able to cope with such threats. Using cryptocurrency solutions, which have already been thought about in Russia, can be the only reliable way to maintain the stability of the financial system.
But the failure of the banking sector is visible not only in Russia. The $14.8 billion penalties for various financial offenses against crypto skeptic Warren Buffett’s Wells Fargo bank show that the performance standards that the BIS prescribes work less efficiently than the code of decentralization’s rules underlying Bitcoin-based financial services from deposits up to loans in cryptocurrency. Huge fines were prescribed to other banks with well-known names. And even if there is bias in it, so much the worse. First, material punishments, in this case, become a way of political manipulation of the banking sector, which ceases to act in the interests of depositors and shareholders. And secondly, the costs of paying fines, in the end, turn into lost profit on deposits.
Of course, world banks will continue to fight for their existence, and various tools can be used here to discredit the cryptocurrency market. But in the confrontation between banks and cryptocurrencies, the gain will be on the side of the latter, by analogy with how the car became the more common means of transportation in the world compared to a horse-drawn vehicle.