The Crypto Banking Apocalypse
Will Crypto Businesses have banking once the next financial crisis hits?
This article will aim to highlight the inherent issues in the current banking climate as they relate to Crypto Businesses (I will use this term often, so in the article I have shortened Crypto Businesses to CB or CBs (plural)) and then run a thought experiment on what the Post-Apocalyptic climate might look like once the next financial crisis hits and how that might affect CBs. If you get to the end of the article there is some bonus content in the form of a lighthearted music video which I created to compliment the article.
If CBs are well run, regulated (if required in their home jurisdiction), open/ transparent and they are willing to do some hard work to identify the right bank and then jump through the required hoops, it is actually not too difficult to open an account. What many founders don’t realize (or choose to ignore) is getting the bank account is only half the battle. The below is not an exhaustive list of the ways in which banking once obtained, could be lost or impaired but it represents the most common issues which I have heard first hand or read/heard about through the Crypto grapevine.
Account Closure, some notice:
From my time in the Crypto space, this seems to be the most common way for a bank to terminate the relationship. The most frustrating part for the founders, is very often the notice comes with ZERO explanation so they have no idea whether they did something wrong or they are being targeted unfairly. In this scenario, the business can at least get its money out provided, of course, they have another bank who will offer them banking.
Account Closure, no notice & funds frozen:
I have heard about this multiple times including from the founder of a blockchain-based Adtech company. They incorporated in Switzerland, got a nice Swiss bank to open an account for them which remained functional for a handful of months until one day they tried to access the account but could not, they had no idea what was going on, tried contacting the bank (email, phone) no response. It took multiple weeks until they found out the account was closed (letter) and a further 2 months to recover the funds. As far as they are aware they did nothing wrong and were transparent with the bank from the beginning about what their business did. They were fortunate to have funds in another bank account to cover operational costs but the stress caused was an unwelcome distraction from their core objectives
Account deposits removal:
This one is comical when you think about it. I’ve only heard about it a couple of times but essentially the bank tells its client that they can keep the account but cannot deposit further funds. So the client can use the money in their account until there is nothing at which time the account becomes useless. It’s a passive-aggressive way for the bank to say we don’t want you as a customer anymore.
Bank gets into hot water, funds frozen/unrecoverable:
Bitfinex is the poster child for this type of issue. According to reports, a company called Crypto Capital got into regulatory trouble and 850 million of Bitfinex’s money is now tied up in various jurisdictions with multiple regulators/authorities. I listened to a very interesting podcast (The Scoop) with Paolo Ardoino CTO of Bitfinex where he mentioned they are still fighting to retrieve the funds, with no timeline for recovery and no success to date.
I’ve also heard first hand from the founder of a Crypto exchange that 2 million of their companies money is caught up in the 200 billion Estonian Danske Bank money laundering fiasco. To be clear their business has done nothing wrong, it was the bank who were the “Bad Actors”, none the less their money is stuck in what will no doubt be a long and drawn-out process of recovery. Fortunately for them, their business generates revenue so they can withstand the loss but that is not the case for most businesses in the Crypto space.
Banks are told by regulators to stop servicing Crypto
The clearest example I can think of is when the Reserve Bank of India announced the below:
This, of course, included banks in India who were providing banking services to CBs. I’ve spoken with two Indian exchanges over the last 6 months who told me that they had to leave the country as it was not possible to run their business without basic business banking. I’ve also ready about a few others who simply decided to shut up shop as it was not possible for them to survive.
The human says yes, compliance bot says no
This may be more prevalent but I have heard it only once first hand. I’m including it as it is quite absurd! CB speaks to a high ranking human at the bank (always a good idea) this person says okay we understand you are a CB and because of your specific circumstances we will offer you banking. Client jumps through hoops (many, many hoops) gets the account uses as described in conversation with high ranking human. Within a month account is shut down.
CB: Calls banking human asks “what the #+0% is going on?”
Banking Human: “well it seems our risk management software has flagged up X activity and it decided to shut down the account.”
CB: “can you override it, we discussed xyz and you said it was okay”
Banking Human: “sorry no can do”
As mentioned in the introduction to this section, the above is not meant to be an exhaustive list of the ways in which banking once obtained, could be lost or impaired it is more a case of highlighting that it is not only difficult finding a bank as a CB but once you have it, it can be tough to maintain access to those banking facilities.
All of this comes at a time when things “appear” to be good in terms of employment, investment returns, economic “stability” and the longest period of expansion without a recession on record. See Charlie Bilello’s excellent summary below.
To use financial speak for a moment, it appears we are very much in a “risk-on” environment which simply means that people with money, VC’s, investors, banks etc are currently taking risks in what seems to be a very low volatility (safe) environment.
The question everyone should be asking is;
“Just how long can this central bank fueled QE/ultra-low-negative interest rate, forward guidance PUMP & DUMP last?”
If your answer is it cannot last forever, that means at some point, the current “risk-on” attitude will become VERY “risk-off”. What will that mean for CBs and their banking?
Before we get to that, let’s take a wider look at other unloved industries who are also considered “High Risk”, industries who also have a love-hate relationship with their banks and payment providers.
While I was in Malta to speak at the AIBC Blockchain conference in early November I met a couple of people from the Medical Cannabis space (they were there for a Cannabis conference a couple of days earlier) and they shared many of the same banking “war stories” related to getting, maintaining and losing banking and payments facilities, this despite the legal, regulated status of their business in their home jurisdiction.
Mid-November I spoke at the Eastern European Gaming summit about Blockchain & Crypto applications in the I-Gaming industry. At this conference, I met a few senior people from large I-Gaming (online gambling) companies who have had the same issues with their banking & payments for longer than Crypto has been in existence. This despite being legal, regulated tax-paying citizens of their chosen jurisdiction.
Now, let’s move to another industry, which again is law-abiding, tax-paying and legal yet continues to struggle with its banking and payments. The adult industry. I spotted the below in my Twitter feed.
Paypal from one day to the next stopping payouts to Pornhub models. As Jeff Garzik says “Paypal will be followed by bank de-risking and direct deposits/SEPA will soon be closed.”
The adult industry is considered “high risk”, just like Crypto. Once the next financial crisis hits, how long will it take for banks to begin “de-risking” CBs?
Let us not forget the infamous operation choke point where
lead to this
Source: American Banker
Could a desperate government looking for scapegoats following the next financial crisis impose a similar “operation” on CBs? How long would it take for an “Ideological crusade based on personal disdain” to befall the Crypto space?
This phenomenon is not reserved only for CBs of course. Anyone with a link to Crypto even personally has had their accounts terminated.
In Bulgaria where I am currently located, I have many Bulgarian Crypto buddies who in the last 12–18 months have had accounts closed following a change of policy by the banks regarding transfers to or from Crypto exchanges.
The below is from the comments section of a Tweet where Roelof F Botha of Sequoia Capital posted a letter showing his bank terminating his account.
Max Boonen founder at B2C2 showing that its not just banks in the US who are messing with individuals who have links to Crypto.
I could go on with 10’s or even 100’s of additional examples but if you are reading this you probably have a toe or perhaps your whole body and soul in the Crypto pond so the above should suffice.
It’s difficult for CBs (and individuals) in the Crypto space to obtain and maintain banking facilities.
Now that the existing state of play has been covered off, let’s take a look at what a post-financial crisis world might look like for CBs who need to do “crazy” things like pay rent, bills, lawyers, employees, Amazon AWS etc.
Just how difficult could it get for CBs once banks are in full-blown “save my own ass mode” and are fully “risk-off”?
Let’s take a look at some potential scenarios which might play out during /after the next financial crisis.
As always happens after a financial crisis, the regulators/politicians who were asleep at the wheel while the Titanic smashed into the iceberg suddenly wake up and drastically overreact with well-intentioned but ill-thought-out regulation.
This is likely going to hit banks HARD! They are already under pressure to meet the current regulatory regime, just imagine a time when their business is in trouble, the regulators are on their backs to implement a raft of new costly initiatives aimed at stopping X financial boogymen from doing unwanted things.
What could that mean for CBs?
What could be easier than getting rid of high-risk clients who don’t add much to their bottom line and only serve to make the compliance headache more pronounced.
Remember the scene in Titanic where Jack (CB) and Rose (bank) were floating on that piece of wood in the middle of the icy northern Atlantic? Now imagine Rose as bigger, more powerful and ruthless. Who gets to stay on the wood and who drowns?
It could also happen (just as it did in India) that some countries simply tell their banks flat out, not to service CBs.
Bank mergers & acquisitions
I watched a great interview with Sy Jacobs who has been analyzing the finance sector (specifically banks) for 20+ years.
In the interview, he mentions something that is already taking place in the banking space. Banks who are being squeezed by a combination of super-low interest rates and high regulatory burden are merging or acquiring other banks to save costs, downsize employees, close branches (all the heartwarming stuff).
This is happening as mentioned earlier when unemployment is at all-time lows, stock markets are at all-time highs and central bankers are running around without a care in the world.
Remember what happened in the 2008–9 crisis? A lot of banks merged or were acquired to save them from going under.
What could that mean for CBs?
Imagine you are with bank X they are “Crypto Friendly” or at least tolerate having you as a customer but they get into trouble and the only way to stay in business is to merge with another bank. Post-merger there is a new sheriff in town and high-risk business is not something they want to deal with so you are suddenly out of luck!
Remember Cyprus back in 2013? If not read this excellent article which will explain the truly horrific shit that went down. Below is a visual representation of what a Bail-in looks like.
One thing to keep in mind, as it looks like depositors are not hurt in this example, is this assumes that no depositor had more than €100,000 (EU depositor insurance)/ $250,000 (USA depositor insurance) in the account. If they had more this amount it would be subject to the Bail-in.
An example of how unlikely the depositor insurance is to meet its obligations is shown below.
Source: Huffington Post
If you’re thinking Cyprus is a little country, it’s a one-off, it couldn’t happen in a G20 country, not to my bank, not in my country. Well, think again…
On the weekend of November 16th 2014 in Brisbane Australia, the G20 ratified banks ability to “do a Cyprus”.
What could that mean for CBs?
Many CB’s have a lot of money in the bank (much more then €100k/$250k), not many have that money spread out over multiple banks, so it’s the old all eggs in one basket routine. Just imagine Crypto founder X waking up one-day thinking arent I great, my business is going swimmingly and we have 5mil in the bank. Later that day he finds out his bank needed some cash so they swapped some shitty bank stock for his lovely cash or they simply gave him a 50% haircut on the deposit amount over the protected amount. Too bad if that means he needs to fire some of his team, they cant implement the latest update to their protocol or platform and investors are screaming and shouting… a rough day all round.
Gating of funds / transfer-withdrawal limits
This already happens to some extent e.g. when a transfer is going to a new recipient perhaps in a new country or maybe the size of the transaction is “out of the ordinary”. Now add banks being in trouble, banks not trusting other banks, regulators being heavy-handed and in some countries, politicians/governments stepping in and pressuring banks to disallow transfers and withdrawals to their customers.
What could that mean for CBs?
Imagine you are a fund or exchange and part of your everyday activity is moving millions of Fiat money through the legacy banking system so you can service your customers, take advantage of investment opportunities, settle margin calls etc. Now imagine your bank saying you can’t move more than 10k per day which is a fraction of your normal volume. All of a sudden your business grinds to a halt, 10k per day doesn’t even cover rent, salaries & lawyer fees… Oh shit!
To be crystal clear, I truly hope I’m 100% wrong and none of the above plays out but having lived through 2008–9 while working in finance in London, watching the financial system grind to a halt and knowing how difficult it already is for CBs to obtain and maintain banking, I don’t see how things get better or stay as they are when the next financial crisis hits.
That’s a pretty bleak outlook I know but there is a way to minimize the potential damage and it lies in a financial concept most of us are familiar with. Diversification
Diversification in this sense means going overboard on the number of bank accounts you think you need. As a Crypto founder, you look yourself in the mirror and you say I need 2 bank accounts for my business to function as things stand. If that’s the case get 5! If you think you only need those accounts in your home jurisdiction, add at least 1 other jurisdiction, if not 2. Spread your eggs in as many baskets as possible, that way if things get worse, after the banks have purged their high-risk clients, you may have lost 3 of your accounts but that still leaves you with 2 and you can soldier on.
I know founders both in the Crypto and traditional startup scene and they are always looking for an edge over their competition. In the Crypto space, having more banking options is already a huge advantage, now imagine you were a good Crypto squirrel, you collected all of your banking nuts and a particularly brutal winter hits. You are safe in your tree with a mountain of nuts while your competitor squirrels are starving and freezing to death as they didn’t gather enough banking nuts.
I truly believe some of the biggest and most important CBs, protocols, platforms, movements etc will be forged in the next financial crisis just as Bitcoin was forged in the last. If you are running one of these businesses and you want to give yourself the best chance of making it through to that time, a time when many of your competitors will have been left on the side of the road it’s time to start building a diversified portfolio of banking relationships.
I think everyone in the Crypto space has heard about #stackingsats by now, as cool as it is, this really is for the Crypto enthusiasts out there, if you are the founder of a CB and you want to make it through the Crypto Banking Apocalypse, its time to start #stackingbanks
I plan on writing an article on how to build a banking portfolio in the coming weeks, so keep an eye out.
If you’ve made it this far you might be feeling a little down so I took some time out to create a lighthearted music video (with me singing, be warned!) to balance out the seriousness with a bit of fun. Hope you enjoy it!
All the best to you and yours for the festive season ahead :D