Blockchain Startups – Why Banks Deprive Them of Accounts?

BTC to DLT: Why Banks Deprive Blockchain Startups of Accounts?

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Life isn’t easy for a startup.

As anyone who has undertaken it would say it’s hard work, low waged, with regular stress and a ruthless journey into the uncertain. But, it’s even tougher for cryptocurrency startups.

Earlier this week, the UK’s Financial Conduct Authority issued a report stressing the struggle that blockchain businesses have in obtaining the essential banking services. Many are confronted with blanket refusals, some are granted restricted access and others get banking support pulled out with no prior notice. And the issue is not confined to the UK.

This makes it tough for cryptocurrency businesses to run, keep aside getting started. (Just try paying for your server space with cash.)

It also does not conform to the UK government’s innovation friendly policy. Officials have frequently emphasized how important fintech development is to the economy, and have shown a clear urge in controlling blockchain technology. What’s more, a statement released a couple of years ago by HM Treasury regarded cryptocurrencies a low risk for money laundering and terrorism funding.

Even some cryptocurrency businesses admitted into the FCA’s sandbox program, which excludes them from full regulatory compliance to promote research, cannot bank in the UK.

The banks subjected are, on the whole, unwilling to make remarks on this, which leaves the startup community feeling that the financial bodies are fearful of cryptocurrencies.

While there can be element of truth to that, the main cause is more likely to be something else.

No big deal

By this time, many financial bodies have a fair understanding of what cryptocurrencies are and how they operate (there has been no deficiency of reporting and conventions on the issue). They see their governments investigating thoroughly, some of their companions trying out coin issuance, and they know that many of their customers immerse themselves in digital token investments.

Cryptocurrencies are not the less known threat they once were.

And it’s not as if the less prominent businesses are requesting the banks to keep their cryptocurrencies for them (not yet, anyway – that business opportunity will appear). The businesses want the banks to support them handle their fiat income and payments. It’s still tough to pay electricity bills and rent with bitcoin.

Moreover, while banks don’t like unpredictability, wavering cryptocurrency prices have a secondary impact at best on a startup’s fiat reserves.

Hesitancy lend to cryptocurrency businesses is a separate issue. It’s not irrational for banks to be scrupulous in who they lend to, particularly considering their squeezed margins.

But this is an issue for all new startups without a track record, not just blockchain ones. And while a loan or two would come in handy, what the startups require most is a bank account from which to send payments.

A Strict Censor of Blockchain Startups

So what are the banks scared of? Unclear legislation and fines.

The global supervisory pressure on financial bodies has paid a big price. Banks have paid over $320 billion in fines since the financial crisis, and with over 200 individual supervisory reforms a day, it’s reasonable that they would rather reject business than being subject to debilitating fees, or probably even license cancellation.

And while a bank may consider safe that a blockchain startup meets compliance regulations today, they have no clue what the regulations will be five years from now, and are obviously afraid of drawing retroactive bans.

It’s not so much the regulations that are the issue – banks are used to adapting operations to comply.

It’s the shortage of comprehensibility around the regulations, both present and future, that acts as an unwanted obstacle to support.

Relieve the barriers

To solve this, some are urging the U.K. government (and others) to command that the banks offer services for cryptocurrency companies. Nevertheless, for many, that is very close to government-regulated financial services, which paradoxically is what most cryptocurrency lovers are philosophically opposed to.

Another alternative – an uncomplicated, less costly and less intrusive one – is to officially proclaim that it is “ok” to bank cryptocurrency startups, hoping they meet reasonable demands. This could take the shape of a sandbox-style regulation which allows certain kinds of accounts from having to conform to the standard regulations.

Or it could be the making of a new category of entity, with a particular operating license: a distinct bank for blockchain-based businesses.

This could foster the inception of a new business model, with fintech startups demanding to sign up cryptocurrency businesses. The opening is notable, provided the possible growth in the sector.

It could also urge banks to create separate subsidiaries to draw a new type of client, to whom they could then cross-sell other services.

The outcome would be not only a benefit to cryptocurrency and blockchain businesses, providing them a secure transactional platform from which to run. It could also aid banking to innovate, fintech to find a new source of growth, and both to close the gap between fiat assets and blockchain-based ones.

And, as time goes on, the financial sector, consumers and controllers will come to understand that the limits between the fiat and the crypto world are getting blurry – which will, in itself, give rise to new soueces of innovation and opportunity.

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