Strategies for Launching a Cryptocurrency-Interfacing Bank
So you’ve decided to launch your own startup bank. And you want it to be competitive in the global banking world while interfacing with cryptocurrencies. Well, you have your work cut out for you because you’re going to find yourself in the middle of an epic battle between governments, which want to regulate everything, and many elements of the crypto world, which want nothing regulated. If you still wish to go forward, consider the following important points.
The Truth About Crypto Transparency
First, let’s dispel some common misconceptions about cryptocurrencies and transparency.
The era of cryptocurrency began with Bitcoin, which radically disrupted the financial marketplace. Today, there are roughly 500 cryptocurrencies traded on a blockchain platform with more coming online almost daily.
Early innovators of cryptocurrencies wanted to create a secure, autonomous platform for the execution of financial transactions that could not be traced by government agencies. I recall attending a conference around ten years ago where the speaker suggested that “Bitcoin was the first currency in the world that you carried around in your mind.”
The idea was astonishing. No need to carry this currency around in your wallet. You could cross borders freely and engage in financial transactions from any location, any computer, any mobile device in the world unhindered by local regulators. No international transaction fees or anything else consuming your assets. Bankers could be totally out of the picture.
Sounds great. Reality, however, does not yet allow for such a paradigm. Banks are required to know the source of all funds passing through their system. Even European banks, which for hundreds of years only issued an account number with no personal name required, have entered the modern era of accountability.
A sophisticated network of anti-money laundering laws now implemented by every bank in the world means that anonymity is a thing of the past. Banks must comply with a tangled web of requirements for reporting to central banks and other national regulators by, for example, filing “suspicious activity reports” (SARs) on all outbound and inbound financial transactions.
Banks and governments also have interests that go beyond preventing fraud. They want to be sure that you pay your taxes. Governments want a reliable platform from which to control the supply of currency in the marketplace and to set interest rates. Banks want a way to regulate cryptocurrencies when they are converted to dollars, yen, euro, etc.
While banks are certainly expected to oversee transactions under their purview, this leaves no space for cryptocurrencies to float around cyberspace incognito without a way of tracing their ownership or origin. As financial institutions tighten regulation, we can also expect cryptocurrencies to ultimately join the league and become more regulated as well, particularly when they interface with banks.
Of course, fantasies still exist of a world without banks, regulations, or government interference, where all financial transactions are based on cryptocurrency. Even if such a world were possible, it’s still a long a way away. So if you’re thinking about launching a new bank that interfaces with cryptocurrencies, you will need to factor in the regulatory realities of our world today.
Banks Do Not Work with Cryptocurrencies
Many banks do not serve as sending or receiving platforms for crypto exchanges nor are they involved in crypto/fiat transactions. Banks consider their responsibilities vis-à-vis money laundering and monitoring for suspicious activities to be paramount. Interfacing with cryptocurrencies may cause them to fail to meet these obligations.
Those banks willing to wade into the world of cryptocurrencies will do so only if they can be certain that they can comply with security and reporting requirements. They may restrict their interface to domestic transactions that have similar regulations, or they may only process transactions for current bank customers.
For example, Coinbase in the United States has cornered a significant share of the crypto exchange market by developing relationships with a number of banks to facilitate transactions, albeit only for bank customers and not for third parties. Some Swiss banks have gone a bit further by including the option of opening a crypto account in their banking services package. They offer to hold crypto coins at the bank for the benefit of the customer.
Banks Are Not Truly Autonomous
As banks and governments sort out the degree to which they are willing to interface with cryptocurrencies if at all, we must remember that individual banks do not really have the autonomy to set up whatever structures they desire. Central bank authorities establish the boundaries of the required and the permissible. The Federal Reserve regulates all banks in the United States, European banks fall under the jurisdiction of the European Central Bank, the Bank of China regulates Chinese banks, etc.
National governments, as advised by their central banks, have the right to decide whether to impose regulatory mechanisms on crypto transactions and how strict those mechanisms should be. For now though, there aren’t really any banks realizing crypto innovators’ dream of a completely anonymous and regulation-free global, crypto/fiat marketplace.
Europe has made some interesting strides towards resolving some of the issues surrounding the crypto/fiat interface by using artificial intelligence. A consortium of some of the largest European banks has been working together with IBM towards a monopoly in this arena that they could leverage to control the industry.
What You Need: A Business Plan and Capital
If your new bank is going to succeed in the global banking marketplace, I would recommend the following:
1. Invest or raise enough capital so that you are an attractive business partner to other banks. A good starting point would be around $10 million. Securing an investment from a bank that is already doing business with cryptocurrencies would also be an effective way to fund your launch.
2. Exercise caution in selecting any potential crypto exchange with which you would want to interface. Be sure it meets all regulatory and licensing requirements.
3. Be even more strict with your own bank’s security and reporting policies than the banks with which you seek to do business. Make sure you abide by the regulations in their jurisdictions.
4. Write a clear business plan that articulates your comparative advantages. Have well-defined strategies for how to implement your plan in the regulatory environments of both your own and your potential partners’ banks.
Your success rests primarily on you being realistic about the changing landscape that you are entering. Until a major shift takes place, you need to be prepared to operate in a regulated marketplace. You may find yourself in a hybrid environment for some time. You must do everything you can to protect your ability to form relationships with other banks. Your global reputation should be at the top of your strategic agenda.
As you wait for the tide to turn, keep the competing interests of banks and the crypto world in mind and utilize that knowledge to map out the most effective way forward.