The gatekeepers of mainstream commerce are keeping their doors shut to cryptocurrency companies.
Entrepreneurs in the digital-assets industry from New York to Hong Kong say that even as some attract investment from multibillion-dollar institutions like Singapore's sovereign wealth fund, they are routinely refused basic banking services by the likes of HSBC and JPMorgan Chase.
While top-tier banks are getting more crypto-curious—JPMorgan rolled out a prototype digital coin last month—most see the growing number of companies in the industry as they have since day one: ticking regulatory time bombs. Crypto isn't the only novel industry having a hard time accessing traditional banking to support its development: a federal prohibition on marijuana has kept big U.S. banks out of the cannabis industry too.
"No bank is willing to help them out," said Robby Houben, a lawyer and professor at the University of Antwerp who co-wrote a paper for the European Parliament on financial crime involving cryptocurrencies. "I have met some really stand-up people in crypto that don't deserve such a bad reputation and want the sector to be regulated, yet for every one of those, there are plenty of others trying to scam the public, launder money or evade taxes."
Digital currencies have attracted outlaws since the first one, bitcoin, appeared a decade ago because they obscure the identities of parties in a transaction and operate outside the regulated financial system. From Silk Road, the online drug bazaar shut down by the FBI in 2013, to Russian intelligence officers indicted for hacking offenses related to the 2016 U.S. presidential campaign, crypto has been associated with illicit activities.
Though legitimate uses have mushroomed in recent years, it's simpler for banks to maintain a blanket prohibition, said Jerry Brito, executive director of the crypto advocacy group Coin Center in Washington.
"The standard answer of 'just go to your local Chase branch' doesn't work in crypto," said Sam Bankman-Fried, chief executive officer of Alameda Research, a digital-assets trading firm in Berkeley, Calif. "It's not illegal for big banks to bank the crypto industry, but it's a massive compliance headache that they don't want to put the resources in to solve."
In the meantime, folks like Jesse Powell, CEO of the crypto exchange Kraken, are caught in the middle. The boss of one of the oldest bitcoin exchanges vented on Twitter in January that he "basically had to employ the arts of a money launderer to survive" after JPMorgan Chase and Bank of America Corp. closed the exchange's payroll account on short notice.
While the largest banks shun crypto, a group of smaller lenders have seized on an underserved market. One, Silvergate Bank in San Diego, said in a November filing for an initial public offering that crypto businesses have as much as $40 billion to deposit. Other banks courting crypto firms include Signature Bank in the U.S. and Bank Frick in Europe.
And some crypto die-hards are doing what you'd expect from those who are committed to a completely unregulated financial system. Mark Lamb, Hong Kong-based chief executive officer of a newly launched crypto derivatives exchange called CoinFLEX, said he pays employees, lawyers and accountants in crypto or in so-called stable coins, such as Tether.
"The banking system has never been friendly to crypto, and while maybe that made some sense in the early days, continuing to label all crypto businesses as high-risk is indefensible and protectionist," said Lamb. "I'm washing my hands of them and now avoid banking altogether."
Even with a former chairman of the Securities and Exchange Commission as an adviser, the payment processor BitPay has been turned away by many banks, said Chief Commercial Officer Sonny Singh in San Francisco. Banks have very rigid know-your-customer and anti-money-laundering policies that "don't adjust for working with crypto companies," he said.
Across the world, regulators have been imposing new rules on crypto businesses, subjecting them to tougher standards for derivatives tied to virtual currencies, introducing new licensing requirements or just reminding firms that their newfangled products must comply with securities and banking law. Those warnings are loudest about the need for banks to meet existing rules to fight money-laundering—a compliance task that already costs financial firms some $25 billion a year, according to one estimate.
Anti-money laundering rules typically require banks to know the identity and aims of their clients and often be able to trace the source of their customers' cash. Building a compliance and monitoring system is expensive and some banks conclude the costs just aren't worth it.
Among those willing to take that risk is Caitlin Long, a former Morgan Stanley banker. She's now leading efforts to introduce blockchain legislation in her home state of Wyoming that would allow for, among other things, a bank dedicated to the blockchain industry.
Wall Street is proceeding tentatively in crypto. Days after its new JPM Coin surfaced, the largest U.S. lender told Chris Matta, co-founder of an investment firm for digital currencies in New York, it will not bank crypto businesses.
Officials for JPMorgan and Bank of America declined to comment on their dealings with crypto firms. An HSBC spokesman said the bank is monitoring the development of digital currencies and regulations governing their use, and does not bank virtual-currency exchanges.
In London, NKB Group, a blockchain investment, trading and advisory firm, has struggled to establish banking relationships, said Ben Sebley, NKB's head of brokerage. The company's association with cryptocurrencies is often an insurmountable obstacle, even after months of detailed discussions with potential banking partners, he said.
"Denying basic banking is madness, impedes sector growth and forces companies to get creative to solve the problem," he said. "The banks are being overly prudent."
