Despite some setbacks, cryptocurrency continues to grow and expand. Now that JPMorgan Chase is on board, will other traditional banks follow?
When a new digital currency called Bitcoin emerged in 2008 from the ashes of the worst financial crisis in living memory, many, like software engineer Niklas Nikolajsen, became overnight converts. In 2011, Nikolajsen moved to the crypto-friendly canton of Zug in Switzerland, where he then built up Bitcoin Suisse, a cryptocurrency financial services firm offering prime brokerage, custody, lending and ancillary services.
Others built cryptocurrency exchanges or businesses that enabled millions around the world to buy, sell and store cryptocurrencies.
It hasn’t always been easy, of course; cryptocurrency exchanges have come and gone or been shut down by regulators, and bitcoin’s price has fluctuated wildly. During the “crypto winter” of 2018, it crashed from $10,000 to below $3,500. In mid-August, it passed $12,000. The cryptocurrency market is currently valued at more than $200 billion, but cryptocurrencies still have not cracked the mainstream.
Despite the challenges, Nikolajsen and other converts have managed to build successful businesses. From a humble startup in 2013, with just two student employees and a rented desk in the lobby of an office building, Bitcoin Suisse now boasts more than 140 employees and “banking-grade” offices in Zug, Copenhagen and Liechtenstein. In 2019, it reported net revenues of nearly $23 million. Yet, Switzerland’s oldest cryptocurrency financial services firm struggled to gain access to the banking services that traditional companies take for granted.
Typically, millions in annual revenues would at least get one through the door, but cryptocurrency firms report problems even getting banks to take their calls. Nikolajsen, in crypto-friendly Zug, where bitcoin can be used to pay for certain municipal services, told finews.ch in 2017 that he had approached more than 50 Swiss and foreign banks before finding one that would work with him.
“It’s difficult to get a bank account when you’re making 50,000 transactions a month,” says Mauro Casellini, CEO of Bitcoin Suisse Liechtenstein. “Not that many banks are open to that. They don’t have the compliance people who understand it or where the bitcoin is coming from. They don’t make a lot of money out of it, and they don’t want to take on the risk.”
Joe Ciccolo, founder and president of BitAML, an international compliance advisory firm exclusively serving the bitcoin and cryptocurrency market, says only a handful of banks are crypto-friendly.
“A lot of banks haven’t taken the time to learn about crypto,” he says. “They have been dismissive.” In most cases, the firms simply want a deposit account, but they struggle to obtain even that. “Many [cryptocurrency firms] are so desperate for a bank account they don’t care who they bank with. They call around to banks, but before they can get a conversation going properly, they hear a click on the other end of the line.”
Cryptocurrency firms are not the only ones reportedly struggling to set up bank accounts and other banking services. Mark Hipperson, CEO and founder of UK-based Ziglu, a digital platform that allows customers to hold crypto and fiat currencies in a single account, says only a few business-to-business banks, including ClearBank in the UK, LHV Pank in Estonia and Silvergate Bank in the US are receptive to fintech startups. Silvergate, based in La Jolla, California, started servicing cryptocurrency firms in 2013. As of June 30, the company reported 881 digital currency customers. Fee income from digital currency customers for the quarter ended June 30 was $2.4 million, compared to $1.7 million for the first quarter of 2020 and $1.1 million for the second quarter of 2019.
“In terms of the current size of opportunity [from digital currency customers], it’s very significant for us,” says Alan Lane, CEO of Silvergate Bank, “but it’s probably insignificant for most of the larger banks.” Lane’s interest in digital currencies was sparked in 2013 when he bought some cryptocurrency. It didn’t take him long to figure out the opportunity for a small community bank to significantly grow its deposit base by servicing a niche nobody else appeared interested in.
Other financial service providers that aren’t afraid to hang their crypto-friendly credentials on their door include Liechtenstein’s Bank Frick, a private, family-run institution that was one of the first banks to offer trading and custodian services for Bitcoin and Bitcoin Cash; and New York’s Metropolitan Commercial Bank, where digital currency customers made up 4.2% of the deposit base as of the end of 2020’s first quarter. What is needed, however, is more banks that are willing to offer cryptocurrency firms transaction-banking services, says Casellini.
“It’s very difficult for a private bank to understand transaction banking,” he contends.
JPMorgan Steps In
An indication that traditional transaction banks could be changing their tune toward cryptocurrency came in May, when The Wall Street Journal reported that JPMorgan Chase had extended banking services to two of the biggest cryptocurrency exchanges in the US, Coinbase and Gemini. No further details were forthcoming as to why the bank, whose CEO Jamie Dimon once referred to bitcoin as a “scam,” suddenly decided to work with cryptocurrency exchanges. However, BitAML’s Ciccolo says Gemini and Coinbase are large, well-established players with a strong compliance ethos and staying power.
Nobody wants to be the first to do anything, says Ciccolo. But with the increased focus on digital innovation throughout the financial sector, banks are under pressure not to miss the boat.
“It is an opportunity to have interaction with some of the biggest and most influential players in the crypto space,” says Ciccolo. Those players that now have had the opportunity to learn and improve their game as a result of multiple regulatory examinations at federal and state levels. “The benefit of having these examinations is that it gives the exchanges a degree of validity.”
In a further boost for the nascent cryptocurrency banking business, the US Office of the Comptroller of the Currency announced in July that all nationally chartered banks were permitted to provide custody services for cryptocurrencies.
“This announcement signifies a real acceleration in the embrace of the digital asset class and the value of digital currency solutions,” commented Robert Cooper, CEO of Digivault, which provides digital asset storage. “Not only does this represent a seismic development for crypto holders in the US, but it echoes a broader trend regarding the acceptance of digital assets amongst global regulators.”
Don’t expect the floodgates to open anytime soon as other banks rush to follow in JPMorgan’s footsteps, however. Most of the global transaction banks we contacted didn’t respond to a request for comment about banking services for cryptocurrency firms. Bank of America issued the following statement: “Bank of America Corporation does not lend against cryptocurrencies, and we do not bank companies whose primary business is cryptocurrency or the facilitation of cryptocurrency trading and investment.”
“Bitcoin is a currency with a checkered history,” says Ziglu’s Hipperson. “Many banks still believe it’s not worth getting involved in crypto because of the potential risk to their reputations and the costs associated with anti-money laundering [AML]. In the last five years, substantial fines have been levied on financial institutions because of problems with AML.”
Just how difficult is it for a conventional financial institution to bank cryptocurrency firms? Are they likely to find themselves in regulatory hot water if they dip their toes in the much-maligned cryptocurrency industry? Lane says it took Silvergate several months to understand what the compliance requirements were under the Bank Secrecy Act and other AML regulations. The results were heartening.
“We built a compliance program to address this specific client segment,” he says. “Regulators internationally are very interested in this. They did not try to discourage us.”
Whether mainstream banks get on board or not, bitcoin’s price, stablecoins (pegged to fiat currencies), and central bank-issued digital currencies are attracting interest. Lane believes more banks will therefore start offering services for cryptocurrency firms. And if they don’t, fintechs are likely to step in as another way to compete with traditional banks.
“Crypto is going mainstream,” says Hipperson, “but banks are always a little bit behind. They have to strike a balance between assessing and managing risk and taking zero risk.”