Unbanking The Unbanked – this saying and countless variants were the cries of many crypto-enthusiasts worldwide, particularly during the 2017 mania around the crypto sphere. Utopian ideas of financial equality and democracy spread like flames, with cypherpunks leading the charge in the promotion of crypto held in private wallets. The ICO boom further fuelled the flames, with billions of dollars worth of funds collected for endless projects, most of which are worth less than the trusty and warshod keyboard I’m typing on. The heralded crypto-lords, mostly self-proclaimed, gazed with contempt at the “old world order,” genuinely thinking that a new age had already dawned and that the existing institutions were looking right into the face of imminent extinction.
“Be your own bank.”
“New world order: decentralisation over centralisation”
With the spotlight burning brightly on the crypto-industry after the increase in the cryptocurrency market cap, slow and steady signs of convergence with other sectors began to emerge, with the underlying intention often being to make use of the underlying technology rather than any particular value in the proprietary token of the same project. Companies that had made their fortunes by selling to the masses the proverbial shovels sought to regulate their industry and plan it for the long term. The ICO fund-raisers quickly discovered that the lack of legal tender status for most cryptocurrencies, coupled with the violent volatility accompanying the market, meant that they had to convert their holdings to stablecoins very least and ideally convert to fiat currencies safely deposited with a licensed credit institution. Safe to say that they had to be very familiar with Lady Irony and Lord Humility.
Needless to say, banks around the world had raised a collective eyebrow as crowds of wealthy crypto-owners turn up on their doorstep to transform a barely understood virtual commodity into cold, hard cash – particularly after the euphoric few months when the banks were seemingly knocked out of business (or so the teenage keyboard warriors thought). The crypto-industry, in general, was immediately labeled as high-risk. For those few banks who did not barricade their doors to anything remotely resembling “cryptocurrency” or “blockchain,” there followed an experiment in “finding the diamond in the rough”. As a result, many diamonds appeared, albeit at a high cost, which the diamonds themselves had to stomach.
Around the top, one continues to see smaller, private banks eager to represent such a high-risk sector in exchange for a ludicrous premium instead of bank account openings for other ‘ordinary’ sectors. These smaller institutions, entirely dependent on their association with respective banks, raised due diligence and performance checks all the way to eleven, resulting in a comparatively low number of crypto-firms from the golden age of 2017 receiving direct banking access. Those cowboys who felt that the normal, internationally applicable rules, such as the AML laws, were beneath them, ended up kicking the can down the lane, with every kick resulting in a downward jolt of their crypto-value, with most altcoins experiencing valuation drops ranging from 90% to 99.9% in some situations. Those who were more diligent and expected an amalgamation of the old with the new survived the so-called crypto-winter.
The business-minded, gray-bearded stalwarts of the crypto-industry, including exchanges, payment service providers, and custodial service providers, worked hard primarily to explain the essence and advantages of the new world order and, as a result, to win the confidence of the old world order. Some mid-tiered banks have also opened their doors to well-established crypto firms, mostly those operating a tight ship on a par with other approved financial service providers. Questionable regimes in commercial institutions such as Seychelles, the Marshall Islands, and St. Kitts and Nevis have been foregone for more respectable alternatives such as the UK, Malta, Germany, and the United States.
What about our ICO mates and other crypto-industry stakeholders?
Although ICOs were faced with a much tougher journey, those who carefully implemented appropriate AML steps during the fund-raising process often sought banking partners. At the very least, access to the IBAN account has been provided by collaborations with electronic-money institutions (EMIs), who have been branded as ‘digital banks’ as late. EMIs, which are also approved in jurisdictions such as Lithuania and Estonia, are rising by thousands and act as the long-awaited link between crypto and fiat for most service providers.
Some bottlenecks in the use of EMIs and small banks are now being solved by using payment institutions, which can also accommodate a high volume of transfers and settle with the bank on a day-to-day basis, providing the best of both worlds in terms of options for the crypto industry. Indeed, the Malta Financial Services Authority (MFSA) legally requires EMIs and payment agencies to use fiat funds to acquire a license under the Virtual Financial Assets Act, greatly expanding the number of options open to service providers wanting entry to the fiat environment.
Talking of regulators, it has become clear that establishing one’s operations in a respectable jurisdiction with a sound legal structure regulating crypto-service providers is essential in the pursuit of access to banking. Establishment in jurisdictions such as Malta, France, Liechtenstein, and Germany will certainly be tantamount to access to either local banking partners or even international banks willing to work with companies following a clear and comprehensive licensing process under the aegis of credible regulatory authority.
As one who has moved from the underground, militant crypto-community to the outside world of regulatory counsel and even advised and supported heads of state and government, I have definitely seen the change of mindset that has taken place in the last few years, with an open mind of collaboration being embraced instead of a confrontational one. I have also observed some promising episodes of mutually beneficial cooperation between businesses pursuing financial technologies and banks seeking advice on the proper use and application of blockchain technology.
Unbanking The Unbanked – Final Word
Like those who believed that life in the wild west would favor them and were sorely mistaken, those who at the other end of the spectrum, the mythical fat cats masquerading as the ‘Untouchable Banks,’ would also face their doom unless they wake up soon and adjust accordingly. If an age-old dinosaur like the U.S. The Federal Reserve is pursuing the development of a central cryptocurrency. Adaptation is a matter of survival, not a matter of preference. The modern world order is changing, and we’re doing what we can to slowly draw the lines so that we can lift the curtain of a point that will be different from what we’ve seen before, in a good way. Call it the post-COVID period, if you want to (with actual rather than viral positivity).