In our article on the regulatory future of crypto, we covered President Biden’s Executive Order on digital assets, which was, in part, the result of under-regulation of the industry that has been growing rapidly in the past years.
Now, with digital assets making headlines every day and consumers wanting more information on how to acquire them, can banks and credit unions play a role in how Americans purchase digital assets?
Relationship Between Banks and Crypto in the US
Most people know Bitcoin – a digital currency – or have taken an interest in it recently, especially after the signing of the Executive Order. A few years ago, the market was mainly dominated by Bitcoin, but, today, numerous players in digital assets are gaining dominance.
Banks in the United States still don’t allow customers to buy Bitcoin and other cryptocurrencies primarily because of regulatory issues around consumer protection, safety and soundness. However, an estimated 2,300 businesses in the US accept Bitcoin, according to fundera.
As a $3 trillion industry, some argue that cryptocurrencies could be used for illicit purposes, or used to take advantage of consumers who are not aware of the risks. The U.S. Department of the Treasury established a new subgroup under the Financial Literacy and Education Commission in March 2022, to provide financial education on digital assets and develop educational materials to help consumers learn about digital assets.
According to this Executive Order, the government’s current understanding of digital assets is as follows:
- Central Bank Digital Currency (CBDC) is “a form of digital money or monetary value”;
- Cryptocurrency is “a digital asset, which may be a medium of exchange”;
- Digital assets are “all CBDCs, regardless of the technologies used…that are used to make payments or investments”.
Large US banks are already investing billions into cryptocurrency and blockchain, and it may be only a matter of time before there are more laws and regulations affecting crypto markets. Particularly, when there are concerns around cryptocurrencies as a leeway to evade economic restrictions, like in the case of sanctions on Russia.
What Should US Financial Institutions Do Today?
With the passing of the ‘Digital Assets Executive Order’ – and the wave of regulatory changes on the horizon – it may be the perfect time for financial institutions to start planning for ways to offer crypto-friendly services to the American public, as well as how to get ahead of regulatory changes. Anti-money laundering (AML) and ‘know your customer’ (KYC) programs will play an important role with any service that involves digital assets.
Anti-money laundering around cryptocurrency should encompass laws, regulations, and practices that are monitored and enforced by financial institutions to stop criminals from converting illegally obtained cryptocurrencies into fiat money.
Financial institutions will need to adhere to regulations governing anti-money laundering and identification of customers to avoid penalties and fully understand the risks they undertake if regulations are not followed. U.S. financial institutions can either play a major role in this new developing industry – or stay behind other countries.
International and Domestic Status Quo
Although digital assets have entered the mainstream and are actively reshaping the financial landscape, the infrastructure is yet to be determined before digital assets can integrate with traditional assets. Global and domestic financial institutions are working to expand offerings and investment opportunities to their customers in digital assets, yet risk management and a secure infrastructure relied upon by conventional institutions is a luxury these new services do not have.
What’s the short-term verdict?
A financial institution can either “wait and see” what happens, or they can lead the way into a possible new financial structure of assets.
The Royal Bank of Canada (RBC) does not have any policies that prohibit their customers from buying or selling digital assets. Their customers can freely transact with cryptocurrencies, but cannot buy or sell cryptocurrencies through their online banking platform. What an account holder can do is connect their account with a trusted and regulated digital asset trading platform in Canada.
The cryptocurrency exchange in Canada needs to be licensed by the Financial Transactions and Reports Analysis of Centre of Canada (FINTRAC). FINTRAC is similar to FinCEN in the US, and both require Money Service Businesses to be registered with them in order to enforce Anti-Money Laundering laws.
Fidor Bank was founded in Germany, but is available in other countries in Europe. The bank has a partnership with Kraken, a cryptocurrency exchange, and users can access their crypto wallets directly through their bank account dashboards.
The United Kingdom (UK) is one of the world’s most crypto-friendly nations, along with Cyprus, Hong Kong, Singapore, and the U.S. In the UK, cryptocurrency is regulated by the Financial Conduct Authority (FCA), but only for money laundering. With very few exceptions, all cryptocurrency exchanges in the UK need to register with the FCA. Cryptocurrency is embraced by an estimated 9.8 million Brits who own some type of cryptocurrency, with Bitcoin being the most common cryptocurrency.
Ally Bank in the US doesn’t allow customers to directly buy Bitcoin and keep it in a checking or savings accounts, but allows customers to link their accounts to Coinbase in the same manner a customer would link an outside bank account. A customer can use the bank’s debit card to purchase cryptocurrency at Coinbase. This way, it is not about buying cryptocurrency directly at Ally Bank, but aligning it as a crypto-friendly banking institution.
USAA also doesn’t allow its customers to buy cryptocurrency, but if a customer has a USAA bank account, it can be linked to their Coinbase cryptocurrency account, which allows customers to track their Bitcon wallet with Coinbase.
Looking Ahead to 2023 and Beyond
Financial institutions should be asking their customers – if offered the ability to either purchase or invest in digital assets, how likely are you to use it?
With those Americans who already hold Bitcoin or other cryptocurrencies, and those who are learning more everyday about digital assets, the answer may be yes.
The road to navigate this still young and volatile crypto market may not be an easy one. Financial institutions need to ensure they have the necessary risk profile, risk assessment, Bank Secrecy Act / anti-money laundering compliance program, and most importantly, a robust regulatory compliance platform in place to keep up with the updates of all important regulations that are forthcoming for digital assets.
In the business world, it may be better to act than to react – and the biggest risk may be doing nothing at all.