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Published on 2022-05-13
In a Nutshell:
Banks do not avoid bitcoin clients because they don’t like them. They are not afraid Bitcoin will replace them as banks in general don’t make their money with anything that bitcoin can replace, but with loans and investment mandates. Banks don’t bank Bitcoiners because in 98% of the cases, their risk is not worth their reward. In order to change that, clients must start to keep their crypto slate clean and report their crypto activity as they do their other financial activity and banks have to start setting up revenue streams from bitcoin customers, enabling them to earn money with it.

Deep Dive:

The problem with banks and Bitcoin is not as old as Bitcoin itself. There was a time where your relation manager at your local bank found it perfectly ok for you to deposit 25,000 USD that you received from selling Bitcoin.

Why has it changed? What caused banks to become afraid of banking bitcoiners? We will explain as we have insights into the compliance and regulatory works of a bank and have a deep understanding of the cryptocurrency sector as well.

Banks don’t care, the regulator does

Before anything else, it must be clear to all readers that it’s not the bank directly that cares about your source of income or legitimacy of your wealth, but the regulator overseeing the banks. Banks have banked criminals since hundreds (thousands?) of years and they will continue to do so, knowingly or not does no matter in this case. The criminal underworld has not waited for Bitcoin to come along to conduct their criminal businesses and even today, the entire Market Capitalization of Bitcoin is multiple times smaller than the entire global black market that has been estimated to be at over 10 Trillion USD 10 years ago (shortly after the launch of Bitcoin) and is surely much higher today.

This means if a bank does not want to have a customer that is trading with cryptocurrencies, it is not the bank that takes a moral high ground or is against cryptocurrencies categorically (as an Idea), but the fact that it is difficult for a bank to comply with local and international laws and regulations when cryptocurrency gets involved. It is not impossible, just difficult. Because it is difficult, the bank has to decide if it’s worth it. In most cases, it just isn’t.  

Risk vs. Reward

It is no secret that banks are profit driven and therefore, they calculate risk vs. reward when it comes to their actions and their decisions, who they bank and who they don’t.

This means that if you are a retail customer, you might generate anywhere between 0 and 1000 USD in fees for the bank per calendar year. That’s the banks revenue from you for having you as their customer. Against this value there is a risk profile. How much risk are you?

Risk for a bank means regulatory and reputational risk. Is it worth banking someone that is at best worth $1000 in revenue but could be the center of a million dollar lawsuit for money laundering or terror financing? Of course not.

A bank is left with a massive imbalance between risk and reward and being private enterprises, free to choose with whom they do business with, they simply just decide to not bank any client that is not fitting into their risk/reward setting. Banks don’t tell you about the reward part and just talk about risks, but it is apparent that if the reward is juicy enough, they are able to look away from certain risks. At the end, our entire life is a balance of risk and reward. It is no different in banking.

A $1000 investment with a 52% chance of getting $2000 out of it is worth it. If its 47% chance, the risk/reward is not in your favor, hence it would be suggested to not do that investment.

High Net Worth Individuals (HNWI) generate hundreds of thousands or millions in fees for the bank, mostly due to investments, loans, etc. and therefore have a much better risk/reward factor and therefore suffer less from this type of problem.

A client with an investment mandate of 1 million USD, a mortgage of $600,000 generates at the very least $50,000 every year for the bank in revenue. This customer has a dedicated relation manager who understands the needs and risk profile of the customer. This customer has much less problems cashing out $100,000 from crypto sales as it is not that much of a share on the risk profile and the reward of the customer is good enough to simply not to make a fuss about it. The relationship manager can talk to compliance and ensure that all this customer does is legitimate. Problem solved.

Do you think a bank cares if Elon Musk sells 100 Million USD worth of crypto and deposits it into a bank?

Bitcoin is like Cash

Another “problem” with Bitcoin is that its most similar product is physical cash. Imagine Bitcoin, from a bank perspective, to be a 750 Billion USD cash market. Given that banks are according to Anti Money Laundering Directives (AMLD) and other regulatory frameworks responsible to ensure that all you do is legitimate (they must know your source of funds), it makes it apparent that a 750 Billion USD cash business is not a good place to start. Banks follow simply put the “cover your ass” method, which means they must be able to proof that they have done everything possible to ensure your funds are legitimate in case there is a lawsuit or the regulator reaches out to them because of you.

It is thanks to blockchain actually easy to track funds but the problem is centralized platforms in other jurisdictions as well as the cost and effort involved for a bank to verify all your claims and trading history. As one can see, its again not the possibility but a question of worthiness for the bank to put in all that effort for you.

The solution

There are crypto friendly banks. In Switzerland we have banks such as SEBA or Bank Vontobel that are having no trouble accepting customers that declare their source of wealth or/and income being from cryptocurrencies. As long as you do not perform a regulated activity without a license, your chances of being banked by them are good (given you did not conduct any illegal activity and your overall background check does not raise any red flags).

Those banks have created dedicated desks specialized staff for cryptocurrencies and they have a better understanding how to avoid unnecessary risks. They know for what to look for, when it comes to regulatory compliance on a blockchain.

The only downside is that customers with less than $250,000 are not onboarded (yet) as the effort and costs involved are too high for those banks to justify onboarding retail customers. Not optimal, but it is a start.

The thing that must happen for banks to become more open to cryptocurrency customers is giving the banks a way to earn money with them. An example is that banks can earn fees on storing crypto assets with them. Banks can offer services such as converting Crypto into Fiat and vise versa. This will justify the increased risk and banks will start to see the benefits of cryptocurrency customers.