“I’m sorry, but your account has been closed”. These are words that no one wants to hear. Individuals and businesses require the services of banks and other financial institutions to function on a day-to-day basis. More and more, however, banks have been closing the accounts of cryptocurrency traders, cryptocurrency businesses and other virtual currency enthusiasts. Often these accounts serve as the “off ramp” from crypto, in other words, the account that the trader uses to cash out his or her crypto into fiat. Sometimes this extends, however, to other accounts held by the trader at that bank that have nothing to do with crypto, such as other personal accounts, credit card accounts and so forth. As a cryptocurrency lawyer I have personally taken many calls from clients devastated by their sudden inability to pay their bills or move money, to say nothing of continuing to trade in crypto.
Sources of Pressure in Cryptocurrency Financial Services
While one can only speculate as to the exact reason that a bank may close an account used to move fiat money to and from a crypto exchange, for example, there are several key forces at work in the banking community that contribute to this trend:
• Legislative Pressure – Back in 2013 the Department of Justice under the Obama administration launched “Operation Choke Point”, an initiative purportedly intended at the time to reduce the risk of money laundering and fraud by targeting so called “high risk” customers such as payday lenders and firearms dealers. The Justice Department would investigate banks that provided services to these industries. The threat of prosecution caused banks to close the accounts of existing customers and refuse to provide services to new customers in these industries. While officially the initiative was rolled back in 2017 through the efforts of the FDIC, the Comptroller of the Currency and the Department of Justice under President Trump, the collateral damage was done – “de-platforming” unfavored industries, like crypto, had become a new norm, and while there no longer remained the threat of criminal prosecution solely for providing services to these industries, banks felt heat for doing so.
• Regulatory Pressure – The Justice Department aside, banks still have significant regulatory pressure under long-standing laws dealing with money laundering and terrorist financing to deny service to any industry deemed to be high risk. The Bank Secrecy Act (as it has been amended by the Patriot Act) forms the kernel of these regulations, and provides that a bank should deny service to industries deemed to be too risky to the bank. Put simply, crypto, in the banking world, is a dirty word, and few are willing to jeopardize their relationships with other banks, regulators and even the Federal Reserve over crypto-related operators, especially for smaller accounts.
• Internal Policies and Procedures – As mentioned, fighting fraud, money laundering and terrorist financing, all laudable goals, can sometimes result in overreach, and banks’ internal policies and procedures are slow to evolve. Compliance departments have enormous power to say “no” to customers still deemed to be high risk, which of course includes crypto companies and traders. In addition, more and more types of businesses are required to have such policies an procedures, such as trust companies, fiduciaries, and other non-bank financial institutions, gumming up the works for crypto companies and traders looking for other places to turn.
• International Pressure – The theme of fighting abuses in the financial system is not limited to any one country. Organizations like the Financial Action Task Force (FATF), a body of financial regulators with representatives from countries all over the world, regularly publish guidance that is then expected to be incorporated into a nation’s laws. Put simply, international organizations have a big say in what is the “new normal” not only in banking in general, but in crypto, and the standards keep getting tighter. Recent guidance from the FATF expands restrictive rules to “Virtual Asset Service Providers”, a class of businesses that includes not only crypto exchanges but businesses way down the line from banks. The FATF also introduced the concept of “hosted” versus “unhosted” wallets, now seen, for example, in United States legislation imposing new crypto transaction reporting rules.
Recent Trends In Cryptocurrency Banking
So, with all of this pressure coming from different places, where is a crypto trader or crypto business to turn? Fortunately, there are organizations that have proven themselves to be more crypto friendly than others. While there are a number of contenders worldwide, within the United Sates Signature Bank, Silvergate Bank and Ally Bank may offer retail customers some options in opening up operating accounts for crypto-related businesses, or for traders looking to connect fiat accounts to crypto exchanges. These are not pushover organizations. New clients should expect to undergo a rigorous background investigation under the aforementioned Anti-Money Laundering / Know Your Customer rules. This investigation will likely require that you produce bank statements, source of funds information and so forth, sometimes including even an organizational chart or business plan. The principals of the business – or the “true beneficial owners” – must be revealed, and will undergo a similar screening process for criminal backgrounds or even adverse reporting in the press.
Another welcome development are state laws that are changing to bring crypto and traditional banking closer together. Wyoming is the clear leader here, home to a new type of animal called the Special Purpose Depositary Institution (SPDI), a bank under federal law that is specifically designed to work with digital assets. Companies like Kraken and Avanti are leading the charge, with Kraken receiving a banking charter in September of 2020. For the retail investor, Kraken is a clear choice as both a crypto exchange and a bank, whereas Avanti (under the expert leadership of one Caitlin Long) will cater more to institutional clients. The good news is that the trend is positive – more and more states are looking at copycat legislation designed to lure crypto banking and crypto financial services business, including custody providers and exchanges.
So, chin up. The path will be rocky but the cat is out of the bag, so to speak, and digital assets will find a place in the banking world, sooner or later.