Rules for crypto assets have increasingly tightened over the past few years, something clearly needed in light of FTX’s collapse.
Solid regulation for the nascent crypto industry brings opportunity — a fact recognized by the UK Treasury. But the current state of affairs shows that UK high-streets banks are impairing this opportunity by erecting barriers.
In France, when an organization is regulated to offer crypto assets to a consumer through the regulatory framework, the banks are then mandated to offer the firm banking facilities. A similar approach should be implemented in the UK.
Not only does the UK need to embrace the opportunities that new financial technologies bring, the UK should prioritize cross-industry partnerships as well.
Banking facilities are lacking
Crypto-related banking has been considered quite risky ever since 2018, when the FCA issued a letter reminding high-street banks of the importance of due diligence when dealing with crypto businesses.
However, in its latest crypto consultation, the UK Treasury did write that “risk taking is a desirable part of the cycle of innovation […] and we wish to manage, not stifle, this.” The consultation is in line with the UK government’s aim to capitalize on the potential benefits offered by crypto to strengthen the UK’s position as a world-leader in fintech.
Nevertheless, there is currently still a lack of banking facilities available to crypto businesses. And if a bank in the UK does offer services to crypto firms, that doesn’t even mean that it won’t turn around and simultaneously block or limit transactions from their customers to other crypto exchanges.
In essence, banks are implementing blanket bans instead of taking a risk-based and case-by-case approach.
This strategy has impacted crypto consumers, as they are unable to move their money from crypto into pounds as they like. Crypto businesses are likewise affected, as they need access to payment rails to pay staff and suppliers. By barring crypto businesses from accessing “mainstream” banking, organizations are forced to use payment service providers (PSPs) rated as higher risk by banks.
A call for collaboration
The Crypto and Digital Assets All-Party Parliamentary Group (APPG) recently held an overall inquiry into the issues the digital assets sector is facing, including banks’ approach and attitudes toward crypto. The findings of the inquiry will be published in the coming weeks.
There needs to be a balanced and risk-based approach in the provision of banking and professional services for UK crypto and digital asset organizations. The fact that crypto businesses cannot have a competitive position within the payments market when banking relationships are withheld stifles growth and innovation.
The UK crypto companies’ recent experiences of being unable to access even the most basic of banking standards with almost all UK banks stands profoundly at odds with the UK Treasury’s professed goal of managing — not stifling — the innovation represented by the development of the crypto asset sector.
A way ahead
A number of potential solutions should be explored, including the creation of a “white list” of platforms that have engaged within the UK’s regulatory perimeter (either through AML registration or other EMI/MiFID licenses), to which transactions should be allowed to take place freely.
In the same way the UK government took the lead on Open Banking as a key step toward unlocking competition and the evolution of the UK fintech sector, UK regulators need to pursue a market-led, principles-based regulatory framework for crypto, as well as challenge the extra barriers to crypto businesses erected by high-street banks.
Some payments regulation (specifically Regulation 105 of the Payment Services Regulations 2017) has set a duty to credit institutions to provide access to payment services providers, incentivizing innovation in the space. A similar approach with new crypto regulation could help the UK to achieve its objective for the sector.
Bring crypto into the fold
Overall, the UK Treasury’s objective is to bring crypto exchanges into financial services regulations for the first time, a fact which surely needs to be applauded by crypto challengers and banking incumbents alike. Banks need to concentrate their focus on innovative transformation, which includes the servicing of crypto businesses.
Collaboration between both high-street banks and crypto businesses is urgently needed to allow for the UK to realize its ambitions to become the most open, well-regulated and technologically advanced capital markets in the world.
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