Tale after tale of cryptocurrency companies struggling to open bank accounts (or even going out of business) shows the difficulty of pioneering this new technology. Most banks don’t want to work with cryptocurrency companies. But why?
More often than not, they point to lax AML controls. But with billions of dollars in fines for AML infringements imposed on banks over the years, that excuse is wearing thin.
Banks don’t want to work with cryptocurrency companies
Take Lamassu, the oldest Bitcoin ATM manufacturer, for example. The company finally relocated to Switzerland a few months ago after struggling to get banked in its native Portugal. According to a blog post on the subject, some 15 banks or so denied the company’s request “just because we manufacture terminals for Bitcoin”. Lamassu added:
“We want to be in a place where rules are well defined and regulators are pro-innovation. An example of this is our struggle to maintain a bank account over the past year. And when I say struggle, I mean we’ve been bankless for the past year.”
Are cryptocurrency companies shirking on their AML obligations?
According to research by P.A.ID Strategies, 68% of cryptocurrency exchanges and custodians are lacking adequate KYC/AML measures. They’re also unlikely to meet the FATF requirements that come out later this year.
Alma Angotti, a managing director at Navigant Consulting Inc (NYSE: NCI), has held senior enforcement positions at the US Securities and Exchange Commission (SEC), the Treasury’s Financial Crimes Enforcement Network (FinCEN), and FINRA (Financial Industry Regulatory Authority). She’s also one of the top money laundering experts in the country. She explains:
“Banks are highly regulated and required to try to detect and prevent money laundering and terrorist financing, and many cryptocurrency exchanges are not well regulated or the regulatory obligations are unclear or undeveloped.”
Moreover, many large banks are still struggling with a lack of familiarity with cryptocurrency companies.
“Digital assets and cryptocurrency are new and not well understood. There are high profile uses of cryptocurrency by criminals, especially ransomware, hacking, and evasion of US sanctions.”
That may be so. However, there are also the very real issues of what Fabio Canesin, co-founder of decentralised cryptocurrency exchange Nash, calls “a mixture of hypocrisy and protectionism on the part of many others”.
The majority of large banks are enablers of illicit financial flows
Warren Buffet was quick to dismiss Bitcoin as a “delusion” that attracts “charlatans”. But let’s not forget his investment Wells Fargo has been fined close to 100 times since the year 2000.
Wells Fargo, a Buffett investment, has been fined 93 times for fraud and other abuses, for a total of $14.8 billion in fines since just 2000
I'll take bitcoin's "charlatans" over that any day https://t.co/9OZkzxgQ7x
— Barry Silbert (@barrysilbert) March 9, 2019
The United Kingdom certainly isn’t falling behind when it comes to accommodating dirty money either. All five of the UK’s largest banks have been sanctioned for money laundering offences over the last decade.
And let’s not even get started on Germany’s Deutsche Bank. Bloomberg estimates the bank has paid out over $18 billion in AML disputes in the last 10 years.
Some banks, including Denmark’s Danske Bank, have even been forced to shut down branches in certain countries because of their despicable behaviour.
All those illicit funds flowing through banks that don’t want to work with innovators of a transparent technology is ironic at best.
Studies place the level of illegal activity and money laundering taking place on Bitcoin at less than 1% of all transactions.
Canesin remarks, “This is much smaller than the official black market portion of GDP declared by several countries… By definition, this means that there is a lot more black money within fiat than cryptocurrency.”
Banks are being myopic when it comes to cryptocurrency
One of the issues is that blockchain technology is still new. Many regulators and banking providers are struggling to understand the methods required for companies to comply with AML. It’s simply easier to close their doors to this emerging threat.
Yet Canesin believes:
“This is a huge mistake, as blockchain can actually help solve a lot of AML issues. Many people realise this and will become important partners of the industry. Others do not move beyond superficial knowledge. They naively try to shut down a potential competing solution, rather than take advantage of the benefits of this technology.”
Cryptocurrency companies should embrace AML solutions as well
Canesin further argues that for any business to be legitimate, they need to thrive within their markets. Therefore, any company blockchain or off-chain must comply with AML. The advantage with blockchain-based solutions is that AML could actually be extremely effective – much more so than the existing solutions used by banks.
For example, it would be impossible for a money launderer to bypass a whitelist on a smart contract, but it’s much easier to corrupt an employee at a local branch, which is what happened in the famous case of HSBC laundering drug money.
“Blockchain-based compliance is not granted by an employee’s rubber stamp but is cryptographically guaranteed by the network and the whitelisting process, which can be traced. This means that there are many promising opportunities for auditing and attestation.”
In fact, on several networks, sources known to be associated with illegal activities can be blocked. This occurred recently on the Bitcoin network after the WannaCry ransomware case.
Banks don’t want to work with cryptocurrency companies, and that’s causing an issue for many. However, it’s impossible to halt the charge of innovation, especially when existing institutions’ own hands are tainted with the dye of dirty cash.
And as Canesin reminds us:
“Legitimate businesses will do their best to comply with AML, but blockchain-based businesses will have better tools for doing so.”