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Banks Are Becoming More Open To Crypto Startups

February 12, 2020
crypto startups

Believe it or not, crypto adoption is actually starting to grow some roots in one place you wouldn’t expect. Traditional institutions and banks. At least that’s the feeling I get whenever I initiate discussions with these players. They’re a lot more open towards crypto startups.

I’ve been involved with crypto for over 4 years now, and have worked in mainstream banking for over 15 years. I’ve seen some serious shifting of mentalities during this time. 

Four years ago, the situation was completely different. There was an uneasy feeling whenever banks were presented with blockchains. It went both ways. It wasn’t just banks that were suspicious of crypto startups. The crypto community was also avoiding contact with anything they considered mainstream, restrictive, and conservative-looking. IE banks and regulators. 

Ups and downs. There are more private blockchains than customers on them

For starters, all banks, institutions, and regulators I talked to were interested in blockchain technologies.

Most are more comfortable with permissioned and private blockchains – the centralized blockchains. These blockchains are ideologically neutral and simply give you a safe option to cash in from the technology. Little by little, banks start to realize that competitors will not be happy to come onboard their private blockchain. Because they want to build their own. On the other hand, clients are not eager to switch technologies if they don’t see an immediate benefit (no, private blockchains do not cut costs and have little of the advantages of a real DLT). The average adoption for private blockchains is 0.5 per blockchain, according to EY. Basically, there are more private blockchains than customers on it. 

Cost is also a major problem, and so is the safety of a not- so-much–distributed ledger. On the other side, banks interested in public blockchain are struggling to find a consensus between digital innovation groups and business groups. 

Although they have their own research groups where they pump their money, they will listen carefully to startups and will be open to formal and informal discussions. Their openness towards crypto startups is closely related to the political situation. 

Breakdown by areas

Unlike Asia or even America, the EU is homogenous. Although the US is one big country, each individual state has a different approach when it comes to crypto. 

In Asia, countries are completely disconnected in terms of legislation. Think of China and India, for example. The current legal infrastructure of China is a mix between the German-based civil law, English-based common law in Hong Kong, Soviet-influenced Socialist law, United States-style banking and securities law, and traditional Chinese law. 

China’s regulation of Bitcoin dates back to the “Notice on Preventing Bitcoin Risk”. The Notice confirmed Bitcoin will not be treated as currency and reaffirmed that there’s only one official currency of the People’s Republic of China. 

At the time of the Notice’s publication, in 2013, Bitcoin was the only major cryptocurrency. But since then, similar prohibitions have been issued for other cryptocurrencies.

In India and other previous members of the Commonwealth, English common law forms the basis of private law. Cryptocurrencies are not legal tender here either, but while cryptocurrency exchanges are effectively illegal, regulations are being considered.

This means crypto stands a better chance to develop in Europe than anywhere else because the market is broad, and the legislation within the EU is consistent. This is a huge advantage for crypto startups. This is one of the reasons we chose to incorporate in Luxembourg.


Sharing our experience with bank representatives, institutions, and traditional investors

Let’s take them one by one:

1. Banks

Banks have to follow protocol. They cannot cut ANY corners. That’s just the way it is, and it will never change. However, if they find a way to work with crypto startups, they will. Of course, you have to do your own homework and bring them a very thorough plan. They would much rather prefer to have everything readily served, and there are plenty of startups pitching for them. If you don’t do the proper and thorough research, someone else most certainly will.   

The problem with banks is that they sometimes freeze accounts or flag crypto operations as suspicious. Sometimes on good authority, otherwise just because their system was over-sensitive and got triggered by an out-of-the-ordinary transaction. As much as they try to be transparent with their AML rules, they are very big organizations with huge compliance manuals and hundreds of pages of AML policies and it’s impossible to explain it in detail to every user for every transaction that is flagged by the system. Moreover the AML policy is quite volatile and forever changing, due to regulation changes and internal changes in risk appetite or internal policies. As a user you have to be aware that usually there is an internal struggle between the compliance department and the commercial departments. Most of the other departments of a bank (except compliance, internal audit, controlling) want to attract more business, more money and more customers.

Obviously, this doesn’t sit well with crypto users, and it makes them lose trust in banks. They would be more than happy to connect with a service that is equipped to solve the crypto compliance problem in  most of the cases.

2. Public institutions and regulators

Public institutions differ from country to country. Some have been (really) slow in creating a comprehensive legal framework for crypto. Others, like Estonia, Lithuania, Swizerland, Malta and Luxembourg, are extremely open. And this is visible through the number of crypto projects launched there. 

This friendly attitude towards crypto has done them very well. Malta for instance managed to achieve a spectacular growth rate of 6.2% in 2018. For 2019, The European Commission has forecasted Malta to outperform the economic growth of the entire continent, with considerable growth of 5.2%. Although it’s not explicitly mentioned, the most likely driver of such growth is the island’s embrace of blockchain technology in recent years.

In Luxembourg, the government’s legislative attitude towards them is generally progressive. On 14 February 2019, the Luxembourg parliament passed a law permitting the use of distributed ledger technology (DLT) for the circulation of securities, facilitating the use of blockchain technology in financial services. In 2016 Luxembourg was the first country to award a Payment Institution license to a crypto exchange (Bitstamp) – becoming the first regulated and supervised exchange. Cryptocurrency dealers here are bound by the same rules as any other financial service provider with regards to the fight against money laundering and the financing of terrorism. Given their widespread use, crypto coins are also accepted to pay for goods and services

Moreover, they’re treated as intangible assets, which means they aren’t subject to income tax until they are disposed of. And all cryptocurrency transactions are exempt from VAT. Needless to say, these are excellent news for crypto enthusiasts. 

3. Traditional investors

Last but not least, I want to also mention the investors we’ve discussed with so far. Like banks, they too are wary in some regards. But they’re also excited by the idea that they can get involved in projects on the bear market and make nice profits in the coming years (by buying low and selling high). 

Unlike other types of assets, cryptocurrencies are not a stable investment. Yet growing numbers of investors choose to diversify their portfolios with digital assets. 

According to a Fidelity Investments research study, out of 441 institutional investors in the U.S., 47% welcome crypto investments. 22% already have some exposure to digital assets, with most investments having been made within the past three years, while 40% say they are open to future investments in digital assets over the next five years.

As you can see, Blockchain is a hot subject for investors on par with Machine Learning or IoT. Traditional investors are looking towards the tech world, expecting the next unicorns, and the crypto field is definitely not overlooked. While crypto users are keen on decentralized values, traditional investors are more pragmatic and hoping to find the next unicorn or a Vitalik Buterin in the making. 

All in all, I think the current legal context is a lot more favorable towards crypto startups than a few years ago. Sure, we’re still far from regulating crypto everywhere, but at least the intention is there. In the coming years, my wish is to see both institutions and crypto enthusiasts coming and working together towards creating a safe market for everyone.

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