Navigating New Financial Currents: How Banks Can Support Virtual Currency Companies

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It’s no secret that one of the biggest challenges facing cryptocurrency/virtual currency companies is obtaining and sustaining a bank account. This fact has been debated in various media outlets, at industry events, and is a popular rant theme on Reddit forums and ‘crypto Twitter.’

This issue is such a challenge that most virtual currency businesses have created staff positions solely dedicated to managing relationships with banks.

Numerous factors are making banks hesitant

Currently in the US market there are fewer than a dozen banks actively and intentionally serving the virtual currency industry. Despite the potential business from promising new companies with significant capital resources, there are still few banking options available to these companies. In part this is due to the regulatory uncertainty surrounding virtual currencies and the reputational risk banks face if they “get it wrong.”

Many banks are already suffering from deficiencies of some form when it comes to BSA or regulatory compliance and lack the resources to develop a program for a new business line. Understanding the complex technology—and the funds flow of transactions processed through the virtual currency business—can be overwhelming.

Most banks lack the agility to dedicate resources toward exploring this new industry. Further, negative news surrounding the potential illicit use cases and the lack of consistent regulatory treatment or licensing framework have rendered most banks unwilling to serve this customer base.

Forward-leaning banks are playing a long game

In 2016, Arnold and Porter, a prominent law firm in the financial services industry, in conjunction with the leading advocacy center on public policy issues facing cryptocurrencies, Coin Center, conducted a study to determine the factors contributing to the challenges companies in this ecosystem were encountering when trying to establish bank accounts.

The results of this study indicated that the handful of banks serving this client base have made multi-year investments in education, regulatory dialogue,  products, customized policies and procedures, and specialized systems tailored to support virtual currency businesses.

How banks can prepare themselves for this new world

Banks interested in servicing this industry should consider the elements required to build a successful new line of business. The foundations for every successful new financial institution product should be:

  • A detailed risk assessment and a comprehensive P&L forecast
  • Strategic focus and dedicated resources to ensure key objectives to developing the business stay on track
  • Training on the industry and technology for employees, executive management, the board of directors, audit partners, and the financial institution’s regulators   
  • An understanding of the risks associated with the business line and the controls necessary to manage these risks
  • Policies and procedures which include specific audits of these controls
  • Specialized software solutions to provide high-tech customers with access to data and transactions while also monitoring for risk and exposure from cyber attacks, illicit activities, and to support anti-money laundering efforts

While the preparations and costs associated with serving the virtual currency industry can be steep, they can also provide great rewards and help move banks toward providing services for the customers of the future.

There are several resources to help both the virtual currency industry and financial institutions to become more comfortable working together. Virtual currency technology and its applications offer valuable new business opportunities for many new and existing businesses that have taken the time to explore its potential. Review the following to learn more:

http://www.wolterskluwerfs.com/article/virtual-currencies-what-banks-need-to-know.aspx

https://coincenter.org/entry/banking-for-virtual-currency-companies

https://coincenter.org/wp-content/uploads/2016/05/banking-obstacles.pdf


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