Last year, it was almost impossible to miss posters for cryptocurrencies plastered all over London’s public transportation network. Crypto was booming, and commuters were subjected to nearly 40,000 crypto advertisements from 13 different companies in the span of six months. These flyers seemed to captivate retail investors and investment bankers alike, with major institutions like Standard Chartered and JP Morgan overseeing major cryptocurrency investments from their London offices alongside a speculating market of some 2.3 million ordinary men and women. The missing link between the two, it seemed, were the high street banks. An agglomeration of building societies, multinational and challenger banks frequently criticised by UK regulators for setting interest rates too low and overdraft charges too high, this group seemed half opposed to these volatile new financial products and half seduced.
What a difference a year makes. The onset of the crypto winter, combined with the fallout from the collapse of FTX, seems to have shut down any interest among UK high street banks in facilitating crypto trading or ownership among their retail customer base. While crypto giants like BlockFi and Grayscale Bitcoin fight for survival, Starling Bank has become the latest British retail bank to insulate itself from the sector, announcing last week that it would now totally ban all cryptocurrency transactions, which it now describes as‘high risk.’ It follows on from a decision it made last summer to prohibit crypto-related transactions using its accounts, only to allow them to resume a week later.
This crypto ban by Starling comes off the heels of Santander’s decision to limit customer deposits to crypto exchanges to £1,000 per transaction and a monthly limit of £3,000. These two banks join the ranks of other financial institutions that have banned or severely limited their exposure to crypto, including Halifax, Nationwide, HSBC, The Co-operative Bank, and Virgin Money. According to the personal finance comparison site Finder, roughly 47% of UK banks currently do not allow customers to conduct transactions with any crypto exchanges.
But the chaos left in the wake of FTX’s collapse aside, British banks will also be concerned by the increasing rate of crypto fraud reported in the country. New data obtained by the Financial Times reveals how losses stemming from crypto fraud reported to Action Fraud surged by more than 30% year-on-year between October 2021 and September 2022. This is despite a general decrease in overall fraud levels as consumers emerge from the pandemic, according to UK Finance.
Perhaps unsurprisingly, some crypto industry figures have reacted strongly to the news of UK banks banning or limiting transactions, describing British banks as a threat to the industry at large. The Twitter account for Sovryn, a decentralised finance provider, condemned the bans as hypocritical. ‘Banks do not meddle in any other "high risk" activities - they'll happily let you purchase tobacco, alcohol, or prescription drugs”, it tweeted. 'Where’s the logic?'
Su Carpenter, director of operations at CryptoUK, believes that, while the need for banks to limit their exposure to potential frauds and scams is understandable, an outright ban on crypto transactions is disproportionate. “There are more effective methods that could be introduced to balance the need to protect potentially vulnerable customers whilst still allowing individuals the right to choose how and where they invest their own money, whether in crypto or other investment options,” she says. “More robust transaction monitoring and the desire to work collaboratively with the crypto and digital assets sector would seem like a more logical way to better understand and mitigate potential risks.”
Carpenter also said that successful crypto scams remain a fraction of the total losses sustained from fraud across the UK, and that there are “highly effective analytics and monitoring tools available to better understand the nature of transactions” that would be a “more appropriate response” to the problem of fraud than instituation's embarking on a straight crypto ban.
But it’s not like banks have a rule book to refer back to when making these decisions, explains Molly White, the software engineer behind ‘Web3 is going great,’ a running list of all the scams, collapses and scandals currently bedevilling the cryptoverse. “If the banks are overwhelmingly seeing issues in the crypto industry, it doesn’t really surprise me that they’ve chosen to take such a broad approach,” she says.
White is also sceptical about solutions purporting to show which crypto companies represent a risk for banks and their customers. “It’s hard to individually predict which companies might later become a problem because, if banks knew a project was fraudulent, then people wouldn’t really be putting money into it,” she says.
As financial institutions and the crypto industry continue to grapple over the right amount of regulation, others in the private sector have begun questioning the longevity and relevance of the industry itself after back-to-back scandals. Earlier this month in The Economist, the FTX collapse was described as a ‘catastrophic blow to crypto’s reputation and aspirations’ while a Reuters podcast similarly declared that the incident ‘consigns crypto to fringes of finance’.
White is less convinced, believing that cycles of collapse and reinvention are in the very nature of the crypto industry. “We saw the collapse of Mt. Gox years ago and some might have said that was the death knell for crypto – but of course it wasn’t,” she says, referring to the Japan-based Bitcoin exchange which filed for bankruptcy in 2014. “The crypto industry finds ways to sort of reinvent itself every couple of years with increasing veneers of legitimacy. So, I’d be surprised if that didn’t happen again unless there’s some sort of external factor involved - like regulatory change.”
Read more: What if Binance collapses?
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