Why Banks Don't Like Digital Currencies?
June 10th 2020
It is no secret that the traditional finance world consisting of its high street banks, Neo/challenger banks or even regulated companies don’t like or are suspicious of digital currencies. Some of the reasons why though, might surprise you. FinTech companies, as the name suggests, is the marriage of “Finance & Technology”. Both of these sectors need to co-exist and operate in the finance world together, resistance to this marriage, in the long run, is futile. As popularity for blockchain and cryptocurrencies products grow, attention from regulators & governments are beginning to increase. What's needed now is increased creditability from coins and the Fintech companies themselves.
On day one our coinpass founders said “Cryptoassets is a compliance nightmare” with a few more swearwords added in. When coinpass was first started we all agreed if we are going to do this right we need to “Play by the Finance Rules” and go through the pain and conform. At every point of coinpass’s evolution over since early 2018, we touched or worked directly with the “traditional” finance and banking counterparties. We chose to work with traditional finance in the United Kingdom to gain their trust and acceptance as well as build our credibility in the financial services space industry. Since 2018 its been clear that compliance and regulatory oversight for the end-point crypto-asset platforms were coming and the early movers would be thought leaders in the space. It is no secret that the UK has been one of the most cautions countries in the world when it comes to UK bank accounts and as a result has forced many companies to head abroad to get an account to do business, little lone take client deposits for trading. This, in turn, has hurt the UK Sterling to crypto trading. Investors and traders are utilising more liquid capital markets in cryptos such as USD or even EUR to satisfy their trading and liquidity requirements even if it means having indirect FX exposure.
But why has this been so difficult and how do we overcome these issues? Well, this is because of many factors that now form part of compliance oversight in crypto assets:
KYC (Know Your Customer)
KYC has been part of the traditional finance world for a long time and is a tried a tested way of identifying that this user is who they say they are. But why is KYC important? The end-user often feels like it’s a frustrating onboard exercise of having to share our documents and then wait in a queue for acceptance. KYC is about protection and transparency of a users financial footprint. With the correct KYC implementation, this will show your banking partner you are serious about keeping the status quo, will also protect them and you against fraud and other issues. The standards for KYC are evolving, but leverage technology we can make this progress seamless to the end-user and keep the tradition Finance world happy.
AML (Anti-Money Laundering)
Money Laundering is a big concern both in the traditional finance world and the digital fintech world. If you are unaware of what money Laundering is, it is an illegal process of concealing the origins of money/coins or token. Money laundering is the act of concealing if the currency was obtained illegally by passing it through a complex sequence of transfers. Why is this an issue for us in the digital finance world?
Some of the first movers in the crypto-asset space adopted relaxed or not KYC processes on their platforms which proved to be a rich source of illicit fund transfers through crypto-asset trading platforms. Not knowing the true identity of users and fund transfers allowed platforms to onboard record numbers of users in a short space of time without any AML controls in place.
To push our digital industry forward we need to also be on board with protecting ourselves, our clients and traditional finance relationship from exposure to this. Most cryptocurrencies/tokens are transparent and transactions can be tracked through the blockchain.
These transactions are more transparent then any bank or financial institute have ever been. This lack of transparency by traditional finance is great news for the crypto space, as the crypto-asset and blockchain industry can show the chain of custody of any asset on the blockchain in real-time while still protecting a users identity from fraud. Also, partnering with other businesses, providing education, training or hiring someone who can serve as a Money Laundering Report Office (MLRO) will empower Fintech companies to be accepted within the traditional finance world and enabling you to partner with the traditional finance world with higher rates of success.
is beginning the adoption of crypto assets, this could be the first component of the full integration. But as of the 1st January 2020, any company wishing to offer crypto-assets in the UK can no longer register with HMRC for AML, you have to register with the FCA. If you are already active within the UK you have to submit your application by June 2020. And if you are not registered by the end of the year you will have to cease trading.
Before you think this is simple registration like the 4 pages you need to submit to HMRC, think again. Our own coinpass Ltd application was a small novel and our MLRO has said it was more detailed than full regulated firm applications for finance companies he has completed throughout his career. The FCA is serious about regulating crypto-firms in the UK.
Compliance- is about a team of people embracing regulatory frameworks for doing business in a given sector and open to marriage with technology. This is probably the most important factor for crypto-asset firms and traditional finance to co-exist. Being compliant and strict on your policies shouldn’t be seen as a way to potentially lose clients or revenue. Being compliant should be viewed as a way to be seen as strictly professional and legitimate with your clients, counterparties and the sector of the industry you are choosing to do business in.
Compliance can be a rather broad term, it can include but is not limited to:
· ID checks to prove who you are and where you live
· Proving the funds/coins or tokens are yours and not gain for illegal means
Compliance officers - are the people in your business responsible for driving AML and KYC processes for each operation in your business. These are the people will interact with regulated teams at banks or even with the regulators themselves. This team will give you the confidence you need to show the traditional finance world you mean business.
Cryptoassets are a victim of their own success. Due to their popularity, the regulators, banks and the government have had no choice but to take notice and acknowledge its’ existence. Since the inception of coinpass, we have seen major leaps forward in this in the last 12months across the globe and we have been following what the UK’s FCA has introduced and tried to embrace it at every step. Recently the FCA provided clarity on tokens and token types called “classification of tokens”. Strangely and thankfully the FCA has begun to adopt terms that were previously only used in the crypto community. These crypto-asset specific terms are now the default narrative that has adopted by regulators, banks and legal services with their cryptospecialist teams are driving innovation and change for the better.
Previous, all crypto was bitcoin and all blockchain was bitcoin The language, narrative and understanding user by traditional finance and regulatory bodies has come a long way in a short time.
So when starting a fintech company and interacting with crypto assets, remember that it’s a marriage of finance and technology. In the finance sector, you need a “Compliance Passport” to be compliant, legitimate and professional otherwise you run the risk of being treated like a virus and all borders can be closed for doing business and growing.
If you have a compliance passport consisting of compliance oversight, registration, compliance personnel, the finance sector will let you come to the table.
Written and presented by Paul Tiley
Co-founder and CTO @ coinpass Limited
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