Your bank, no matter how neo or how challenger, can’t bank Bitcoin (BTC). They could bank blockchain companies, adding value and providing services for the space, which would be good for both the bank and the clients, but they are afraid of repercussions from regulators and their partners.
Since many smaller banks use “correspondent banks,” whose direct access to the Federal Reserve system’s FedWire and other official payment rails they leverage, they can’t make the decision to accept Bitcoin clients in a vacuum. They must consider their correspondents (generally, big banks), who don’t want their partners working with crypto — a classic underbanked industry.
At industry events — whether for banking or digital assets or crypto conferences — the fact that demand outpaces supply is as clear as stargazing season. Silvergate Bank, based in La Jolla, California, was the first bank to enter the blockchain industry. However, there are not many so-called crypto banks among the 5,400 banks in the United States despite obvious use cases for the underlying technology, such as facilitating payments, digital contracts or serving as a store of value.
Banks should want to get in and help the industry with banking services. While there is a high compliance risk, crypto is not illegal. Those banks that serve the industry will be tasked with implementing Anti-Money Laundering and Know Your Customer procedures that are robust enough to pass regulatory scrutiny.
The fact that so few banks are banking crypto is surprising. If they’re wanting to stay within the purview of the law, then they could serve clients or work with partners who take compliance as seriously as they do, and not be influenced by the propaganda that associates illicit activities with digital assets and crypto.
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The banks that facilitate bringing some of crypto’s use cases to market will be proud of themselves in the end. This task is not for the faint of heart — it will take a large effort to begin serving the blockchain industry. Banks will need to build out a robust program to serve the industry and keep regulators satisfied. Those looking to establish crypto services should go to these banks beforehand, let them know the business’ plans, and ask them to help build the program so that both parties can be sure that any and all regulatory burdens will be met and that the business can go to market. The business’ board may perhaps need to be educated on blockchain and crypto so as to approve everything. Before onboarding crypto clients, banks must not only vet potential clients but also dedicate the resources and time upfront to vet their technology partners and clients.
Not all banks are created equal, however. The level of access to the global payment rails will surely differ from bank to bank. Some might offer unlimited deposit insurance, some may offer no insurance at all. No businessman wants to go through life with uninsured deposits or moving excess funds into other banks.
A simplified banking relationship all-encompassing of insurance, loans and the wares of a better banking experience is what crypto needs — a bank willing to hear what people need and will work together in an industry pushing the envelope. The blockchain industry also needs a progressive-minded bank ready to harness the power of APIs, if the model works for them.
The American cloud-based software giant company Salesforce has become a world leader, in part, due to its willingness to go all in when it comes to the use of APIs. The financial institutions best leveraging open-banking and APIs will be the market leaders of tomorrow, when a bank’s relationship with crypto companies — and any fintech firms for that matter — will be managed via a web of APIs. These APIs will bring us the next great products in banking.
The fintech firms will bring the technology, while the enterprising and even courageous banks will bring their banking charter and payment rail access to the table. The banking industry’s new emphasis on technology will be welcome news for developers, who are not excited about developing around antiquated technology stacks using wireframe and the common business-oriented language known as COBOL. For banks considering dipping their toes in the water, there are banking technology companies serving this market, such as the San Francisco-based Treasury Prime, which works as technology partners to banks and fintechs, and Bitfury, which provides an AML and KYC toolkit to the banking industry.
At the intersection of banking and crypto, blockchain integration with banking could even enhance the banking experience for everyone. By being able to use some of the use cases that are going to be provided by blockchain and crypto, overall banking relationships, products and services can be much speedier.
The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of CryptoX.
Justin O’Connell is the founder of ChangeOutput.com, a communications shop for blockchain. He first wrote about Bitcoin in early 2012, and has worked in the industry ever since. He has software engineering experience, and his written work has appeared throughout the industry over the years.
