Why is it so hard for crypto exchanges to work with banks?

Banks and crypto exchanges often clash – here’s why the relationship remains so complex and cautious. But payment service providers may be able to help.

Crypto exchanges and banks come from different places at different times. So, it’s no surprise that they have different ideas about money, who creates it, who owns it and who’s in charge. This has made working together difficult, although things are changing.

It’s not just different ideas about ideas, but also about regulation. Crypto is such a new area, so old rules don’t fit neatly. The internet has no borders or central regulatory authority, which complicates matters and leads to regulatory arbitrage and uncertainty.

Until crypto goes mainstream, there is always going to be the practical problem of converting fiat into and out of crypto. Doing this through banks, crypto-native companies and on/off ramp providers is difficult, although there are alternatives.

New money

The first institutional loan with interest was made by the priests of ancient Mesopotamia in around 3,000 BC. Fractional reserve banking dates from medieval Italy, while double-entry bookkeeping had existed since 1300, before really taking off in the 15^th century.

Contrast that with crypto, which started in reaction to the 2008 financial crisis. Satoshi Nakamoto’s paper, Bitcoin: a peer-to-peer electronic cash system, proposed a new way to create money, exchange value and organize the financial system.

Money is about trust. Yet Nakamoto’s model was trust-less, putting faith in computers and code, not governments and banks. In a decentralized, peer-to-peer network, where the participants make up the network, Bitcoin belongs to everyone. Everyone is involved but no-one is in charge.

You can imagine what banks think of that – not to mention governments and regulators.

New regulation

Banks are highly regulated institutions bound by national requirements in every jurisdiction in which they operate. Whereas the internet of money is borderless and unregulated. Crypto firms and banks are operating amid uncertainty as the regulatory environment for crypto is evolving and differs between jurisdictions.

Recent initiatives to develop clear, consistent regulations are helping banks feel more confident in working with crypto firms, and vice versa. They include:

• The EU Markets in Crypto-Assets (MiCA) Regulation, which establishes a legal framework for crypto assets service providers, giving banks a more predictable basis to assess risk.
• The UK Financial Conduct Authority (FCA) registration regime, which allows crypto firms to be formally registered and supervised, increasing their credibility with banks.
• US OCC Interpretive Letters (e.g. 1170, 1183, 1184) have clarified that national banks can provide custody and other services for crypto assets.
• The Basel Committee on Financial Supervision has published a framework on how much capital banks need to hold for crypto exposures, which encourages more formal risk management.

Banks don’t want regulatory investigations, fines or bad publicity due to their crypto customers. Any more than crypto exchanges want service interruptions, frozen accounts or to be offboarded by their banking partners. Regulation is helping to increase the trust between banks and crypto exchanges.

New interface

Crypto exchanges, iGaming operators and businesses that accept crypto pay-ins are looking for a way to pay out, without necessarily going through traditional banking institutions. Ultimately, they want funds to end up in a bank account, though.

PSPs may be the answer. They are the conduits contributing to the smooth flow of funds between traditional and newer institutions. For example, when clients send a transaction to Inpay, it’s not going directly to a bank, rather to a PSP with an electronic money institution license.

Inpay can pay out to a local bank account without transactions being blocked. We help open new markets, insulate our clients against changing crypto regulations and improve the end-customer experience.