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Banking for crypto business a global issue

Ups and downs: the high volatility of cryptocurrencies such as bitcoin is one of the reasons why many large banks are reticent to involve themselves in crypto-related banking. Bermuda is in the process of establishing a new class of banking licence to provide banking services to Bermuda-based fintech companies

A new class of banking licence being introduced in Bermuda could address a hurdle that has crimped the progress of fintech and blockchain business around the world.

What form the solution will take in Bermuda has yet to be established.

However, there are clues in a limited number of countries and jurisdictions that have similarly looked to introduce a workable interface between blockchain-based companies, including those involved in digital currencies and tokens, and traditional banking services.

In Switzerland there are about 200 blockchain-based companies in and around the small town of Zug. While the country has been embracing the idea of becoming a “crypto nation”, it is grappling with the issue of how to provide banking facilities for blockchain and cryptocurrency companies.

As a consequence, many of those start-ups have had to look elsewhere for banking services. Some have turned to the tiny European principality of Liechtenstein, where Bank Frick has introduced direct crypto investment in the leading cryptocurrencies of bitcoin, bitcoin cash, litecoin, ripple and ether. It has also helped more than 20 initial coin offering projects establish traditional bank accounts.

Fidor Bank in Germany, and Swiss private banks Vontobel and Falcon Bank, have also agreed to handle cryptocurrency-based investments. Tokenpay, a blockchain-based payment platform registered in the British Virgin Islands which has banking operations, has partnered with Swiss-based blockchain asset management service company Coinlab Capital.

But generally, there are few options around the world for crypto-related banking, due to regulators and major banks being reluctant to enter the field. The likes of JP Morgan and Goldman Sachs have listed cryptocurrency and related technology as potential risk factors, although Goldman Sachs has also said it is planning a crypto-custody offering. HSBC is reportedly monitoring and “cautiously looking” at cryptocurrency use.

The high volatility of cryptocurrencies is another reason why many large banks are sitting on the sidelines. In the UK some banks ban customers from using their credit cards to speculate on cryptocurrencies. The potentially crippling wild swings in valuations have been well illustrated by bitcoin, the world’s biggest cryptocurrency, which touched $19,700 in December but had fallen to $6,300 yesterday.

Bermuda’s established banks have shown no appetite for providing banking services linked to cryptocurrencies and distributed ledger technology. The Bermuda Bankers’ Association reportedly explained to the Bermuda Government that this reticence was due to the financial institutions’ “ongoing need to manage their risks to continue to operate in accordance with their existing correspondent banking relationships”.

It is against this backdrop that the Government last month tabled the Bermuda Monetary Authority Amendment (No 2) Act 2018, and the Banks and Deposit Companies Amendment Act 2018.

In a prelude to the tabling of the Bills, David Burt said: “In the wake of the global financial crisis and the ever-broadening risk mitigation strategies, banks are increasingly risk-averse. While that is understandable, as given their risk tolerances, to date local banks have been unwilling to offer services to newly incorporated fintech and distributed ledger technology companies.”

The Premier said securing banking services has been the greatest challenge for the fintech industry in Bermuda and elsewhere, and the legislation will allow for a new class of bank that will provide banking services to Bermuda-based fintech companies.

As of last month Bermuda had 21 fintech companies incorporated on the island, and a similar number are waiting to do so, according to Mr Burt.

When the two Bills reached the Senate at the end of last month, Vance Campbell, a government senator, was asked if any banks had been identified that would take advantage of the new class of licence. He said: “While we know that there are banks globally that do provide banking services for the fintech industry we have not identified a specific bank here.”

With a number of countries and jurisdictions grappling with the same challenge and looking to lead the way with a solution likely to bring more fintech business their way, time is of the essence, noted Heinz Tännler. The finance director of the Zug canton in Switzerland said it was hoped that the relationship between crypto companies and banks in Switzerland would be clarified by the end of this year.

“Time is pressing — other jurisdictions such as Malta and Singapore are very active and making a lot of effort to attract these companies. The lack of access to bank services is a significant competitive disadvantage,” Mr Tännler said in an interview with The Financial Times.

Mr Burt takes a similar view. While acknowledging that the island’s traditional banks have played their part in the community over the years, he said to survive and grow businesses must evolve and innovate.

He added: “Legacy industries the world over have lost that ability and the future belongs to those who can quickly lay a foundation for growth, respond to emerging trends and preserve a reputation for sound management in the process. For countries it is no different, Bermuda must be nimble or we will be left behind.”