BTC to DLT: Why Aren't Banks Giving Blockchain Startups Accounts?

Noelle Acheson is a 10-year veteran of company analysis and corporate finance, and a member of CoinDesk's product team.

The following article originally appeared in CoinDesk Weekly, a custom-curated newsletter delivered every Sunday, exclusively to our subscribers.

Life isn't easy for a startup.

As anyone who has tried it knows, it's long hours, low pay, constant stress and a relentless march into the unknown. But, it's even harder for cryptocurrency startups.

Earlier this week, the UK's Financial Conduct Authority published a report highlighting the difficulty that blockchain businesses have in getting basic banking services. Many are met with blanket refusals, some are given limited access and others get banking support yanked without warning. And the problem is not unique to the UK.

This makes it difficult for cryptocurrency businesses to operate, let alone get started. (Just try paying for your server space with cash.)

It also contradicts the UK government's pro-innovation stance. Officials have often stressed how vital fintech development is to the economy, and have expressed an explicit interest in harnessing blockchain technology. What's more, a report issued a couple of years ago by HM Treasury deemed cryptocurrencies a low risk for money laundering and terrorism financing.

Even some cryptocurrency businesses accepted into the FCA's sandbox program, which exempts them from full regulatory compliance to encourage experimentation, cannot bank in the UK.

The banks in question are, on the whole, reluctant to comment on this, which leaves the startup community assuming that the financial institutions are afraid of cryptocurrencies.

While there may be some truth to that, the main reason is more likely to lie elsewhere.

Not so scary

By now, most financial institutions have a reasonable idea of what cryptocurrencies are and how they work (there has been no shortage of reporting and conferences on the subject). They see their governments probing deeper, some of their peers experimenting with coin issuance, and they know that many of their customers dabble in digital token investments.

Cryptocurrencies are not the misunderstood threat they once were.

And it's not as if the marginalized businesses are asking the banks to hold their cryptocurrencies for them (not yet, anyway – that business opportunity will emerge). The businesses want the banks to help them manage their fiat income and payments. It's still hard to pay electricity bills and rent with bitcoin.

Furthermore, while banks don't like volatility, fluctuating cryptocurrency prices have a secondary effect at best on a startup's fiat reserves.

Reluctance to lend to cryptocurrency businesses is a different matter. It’s not unreasonable for banks to be selective in who they lend to, especially given their squeezed margins.

But this is a problem for all young startups without a track record, not just blockchain ones. And while a loan or two would be nice, what the startups are most in need of is a bank account from which to make payments.

A sharpened knife

So what are the banks afraid of? Unclear regulation, and fines.

The global regulatory clampdown on financial institutions has taken a heavy toll. Banks have paid over $320 billion in fines since the financial crisis, and with over 200 individual regulatory changes a day, it's understandable that they would rather turn down business than risk crippling charges, or possibly even license revocation.

And while a bank may feel comfortable that a blockchain startup satisfies compliance rules today, they have no idea what the rules will be five years from now, and are understandably afraid of attracting retroactive sanctions.

It's not so much the rules that are the problem – banks are used to adjusting processes to comply.

It's the lack of clarity around the rules, both current and future, that acts as an unnecessary barrier to support.

Let them in

To address this, some are encouraging the U.K. government (and others) to insist that the banks provide services for cryptocurrency companies. However, for many, that is skirting too close to government-controlled financial services, which ironically is what most cryptocurrency enthusiasts are philosophically against.

Another option – a simpler, less expensive and less invasive one – is to officially declare that it is "ok" to bank cryptocurrency startups, assuming they meet reasonable requirements. This could take the form of a sandbox-style regulation which absolves certain types of accounts from having to comply with the standard rules.

Or it could be the creation of a new class of entity, with a specific operating license: a special bank for blockchain-based businesses.

This could encourage the birth of a new business model, with fintech startups clamoring to sign up cryptocurrency businesses. The opportunity is significant, given the potential growth in the sector.

It could also encourage banks to establish dedicated subsidiaries to attract a new type of client, to whom they could then cross-sell other services.

The result would be not only a boost to cryptocurrency and blockchain businesses, giving them a safe transactional base from which to operate. It could also help banking to innovate, fintech to find a new avenue of growth, and both to narrow the chasm between fiat assets and blockchain-based ones.

And, as time passes, the financial sector, consumers and regulators will come to realize that the boundaries between the fiat and the crypto world are getting fuzzier – which will, in itself, open up new areas of innovation and opportunity.