Why Cryptocurrency Businesses are Poised to Come in From the Cold

By Leon Gauhman, Founder & CPO/CSO at Elsewhen

Despite enjoying rapid growth, the cryptocurrency sector has often been weighed down by its associations with criminality, fraud and money laundering. For many banks, owners of crypto businesses are still viewed as being on a par with mafia bosses in terms of their trustworthiness and risk factor. Consequently, they have been largely excluded from access to standard banking services, tools and funding.

All that could be set to change, however, thanks to a recent announcement by a little known division of the US Treasury, the quaintly named Office of the Comptroller of the Currency (OCC). The OCC, which regulates the US national banks, has published an “interpretive letter” which paves the way for banks to offer fiat bank accounts and cryptocurrency custodial services to cryptocurrency businesses. In a key passage, it says: “This letter reaffirms the OCC’s position that national banks may provide permissible banking services to any lawful business they choose, including cryptocurrency businesses, so long as they effectively manage the risks and comply with applicable law.”

While the OCC’s intervention is unlikely to transform the cryptocurrency sector’s reputation overnight, it will undoubtedly accelerate crypto’s entry into the mainstream. Here are five reasons why:

1. It improves Crypto’s tarnished ‘goodfella’ image

The OCC’s letter provides some much-needed clarity on what has arguably been a confusing area and signals to US banks that trading in crypto assets is now regarded as legitimate. This positive regulatory shift is not limited to the US market. It follows similar developments in the UK, where the Financial Conduct Authority is bringing clarity to its own crypto regulatory regime, and Germany, where the Financial Supervisory Authority (BaFin) issued guidance in February 2020 that eased restrictions on banks providing custody of crypto assets. Viewed holistically, these moves provide regulatory reassurance for banks in key financial markets seeking to embrace cryptocurrency. If banks can convince themselves there is a viable business case, it could trigger a new model: servicing relatively high risk clients, while maintaining bullet-proof KYC and AML procedure as the foundation stone of business continuity.

2. It will unleash a wave of new investment

Proactive moves by regulators like the OCC are the first step towards crypto firms being able to access banking services on the same basis as any other customer. This signal from the regulator that they are willing to support banks in working with crypto businesses will help attract those investors from outside the Silicon Valley/VC bubble who need the reassurance of larger banks to ensure they are not embarking on a risky venture. There’s already some evidence that institutional investors in the US and Europe are looking favourably at the cryptocurrency ecosystem. The OCC’s letter should also fire up fintech challenger brands – which have the agility and mindset to move quickly.

3. It could kick start competition for the best digital brains

The case for crypto has no doubt been helped by the fact that the OCC appointed former Coinbase exec Brian Brooks as its chief operating officer. Big banks – which have traditionally recruited from within the sector – would be well advised to follow the OCC’s lead if they want to implement an effective pro-crypto business strategy. Key ways to do this include acquiring stakes in crypto/blockchain companies or poaching top talent (maybe entire teams) from them. This kind of investment will send out a message that big banks are taking cryptocurrency seriously.

4. It potentially opens the door to more crypto innovation

A combination of new talent, increased investment and favourable regulation is likely to usher in an era of white hot innovation within the crypto currency sector and crypto related applications. Bitcoin technologies are already being identified as having the potential to deliver increased visibility (and fairness) in the supply chain and streamline legal transactions. Ultimately, tech innovations driven by a re-energised cryptocurrency sector could contribute to reinventing the role of banks/brokers/accountants through innovations such as security tokens (digital representation of underlying rights in an asset). With many financial services intermediaries now too cumbersome, inefficient and insufficiently focused on their customers, security tokens have the potential to eliminate the need for intermediaries to execute transactions, transforming the banking ecosystem.

5. And paves the way for out of the box, mash up partnerships

Legacy banks, fintech challengers, crypto exchanges, VC and big tech are eyeing up the crypto sector’s growth potential – so they will all welcome any encouragement from bodies such as the OCC. Each of these groups can boast built-in advantages such as large customer bases, best practice user experience, cultural agility, deep cash reserves, rich data insights or freedom from legacy tech. None however can boast all of these strengths – so the market looks ripe for potential alliances that might secure leadership status in the sector. In the same way that legacy banks co-opted fintechs to get into the challenger bank space, they may seek to invest in crypto-first neo banks, perhaps alongside venture capital. Alternatively, we might see alliances between crypto exchanges and big tech – a combination that would combine frontline expertise, cash reserves, big data skill sets and cultures unconfined by geographic borders.

Even with regulatory approval, legacy banks will face a number of challenges in adapting to the rise of crypto as a legitimate sector. But three decades of digital innovation remind us that brands that move too slowly to embrace new tech often find themselves in a battle for survival. This seems to be especially true now, in the midst of the Covid-19 crisis. Not many sectors would claim to have benefited from the current pandemic, but the general consensus is that cryptocurrency is tailor-made for the new normal