A lot has happened in the five years since FCA issued its letter in 2018 reminding high street banks of the importance of due diligence when dealing with crypto businesses. However, regulatory warnings and recent bank failures have seen UK high street banks continue to turn their backs on crypto clients.

Access to traditional banking facilities is becoming increasingly more limited, and those who have managed to secure banking relationships are finding that transactions from their customers to other crypto exchanges are now being limited or restricted. This position has created a stalemate in the industry and is profoundly at odds with the UK’s objective of becoming a global digital hub.

More regulatory certainty

One of the reasons previously provided for the limited access was the need for more regulatory certainty. The relatively new and rapidly evolving crypto industry presented a challenge for banks operating within strict regulatory frameworks to ensure compliance with anti-money-laundering (AML) and Know-your-customer (KYC) regulations. However, fast forward to 2023, and the global regulatory landscape is fast evolving. Following the collapse of FTX and other high-profile failures in 2022, rules are increasingly tightening.

The UK Treasury recently set out its objective of bringing crypto exchanges into financial services regulations for the first time, extending the regime beyond AML. This much-needed regulatory clarity brings opportunity across financial services in general and in establishing the UK as a digital hub. However, this is only achievable if high-street banks and crypto firms collaborate, and the first step towards this has to be the availability of banking services.

Financial exclusion stifling innovation

Many UK banks have in place blanket bans or restrictions on transfers to crypto-asset platforms, directly affecting both consumers and crypto firms themselves. Consumers are affected as they cannot convert their crypto into pounds and face restrictions on potential investment opportunities. Crypto firms are affected as they need access to payment rails to run their businesses.

Failure to secure mainstream banking facilities means firms are forced to use payment service providers, or intermediaries, rated as higher risk by banks. Whilst indirect banking is not unique to the crypto industry, its importance has become more pronounced due to the limited number of banks willing to work with digital asset firms.

Is this financial exclusion stifling the innovation represented by the development of the crypto asset sector – something profoundly at odds with the UK Treasury’s objective of establishing the UK as a digital hub?

The Crypto and Digital Assets All Party Parliamentary Group (APPG) recently held an inquiry into the digital asset sector’s issues, including the banks’ approaches towards crypto. What is clear is that to foster growth and innovation, and allow crypto firms to have a competitive position within the payments market, a balanced and risk-based approach to providing banking services for UK crypto and digital asset organisations must be implemented.

As CryptoUK, a leading industry body, recently cited in communications to the FCA and HM Treasury, blanket bans are anti-competitive and disproportionate. What is needed is a risk-based case-by-case approach.

All banking services are subject to some form of risk. A direct quote from HM Treasury stated that “risk-taking is a desirable part of the cycle of innovation and something we wish to manage not to stifle, in line with the government’s aim to capitalise on the benefits offered by crypto to strengthen the UK’s position as a world leader in fintech”.

Assessing risks

Cryptocurrency transactions may carry certain risks, such as money laundering, fraud and security breaches. However, banks are well-versed in managing and mitigating such risks and have well-established compliance frameworks and security infrastructures to protect customer funds. They can already implement effective and robust security measures, conduct enhanced due diligence and monitor transactions – thereby minimising any potential risks associated with the crypto industry.

It is worth noting that other financial institutions, such as challenger banks and online platforms, offer banking services to crypto firms. How do they find comfort in extending banking services to crypto firms? By doing what they do best – assessing the risks involved on a case-by-case basis, establishing robust compliance measures, and adapting their operations to the unique characteristics of the crypto industry.

Offering banking services to crypto firms can yield multiple benefits for the banks involved, from new revenue streams and expansion of customer base to establishing themselves as forward-thinking institutions embracing the digital revolution.

Protecting consumers from fraud is a primary objective shared by UK banks and crypto firms. Many crypto firms have AML registrations, EMI or MiFID licences and invest significant time, money and resources into compliance and consumer protection. Indeed banks should consider this when assessing the potential risk of crypto clients.

It makes sense that those falling within the regulatory perimeter pose a lower risk than those outside. Finding a way for banks to work with these firms in extending banking services without restrictions is critical to helping the UK achieve its objectives for the sector.

Greater collaboration will yield better opportunity

Banks have a depth of experience in navigating complex regulatory environments and can provide guidance and expertise to crypto firms as they implement evolving regulatory frameworks.

As cryptocurrencies gain wider acceptance, banks offering services to crypto firms may find themselves attracting a new demographic of customers and enhancing their reputations for embracing technological advancements. In contrast, last year it was reported that 55% of the top 100 banks (by AUM) invested in companies operating in the blockchain or digital currency spaces.

For the UK to establish itself as a digital hub, there must be better synergy between traditional and digital finance. Banks offer established infrastructures, expertise and trust in the financial industry, whilst crypto firms bring innovation and disruptive technology. By joining forces, there is enormous potential for combining the best of both worlds to benefit customers.

As the crypto industry continues to mature, as regulatory frameworks become clearer and as risk management practices improve, it is hoped that high-street banks might soften their cautious approach and begin offering services to crypto firms helping high-street banks fully embrace digital innovation and assisting the UK in achieving its aim of being a digital hub.