Is Traditional Banking Under Threat from Cryptocurrency?

As more and more businesses begin to accept Bitcoin and other cryptocurrencies as a form of payment and companies turn their IPOs into ICOs (Initial Coin Offerings), traditional banks are looking to the future. Is traditional banking really under threat from cryptocurrency?

What Are The Implications Of Cryptocurrency For Banks?

The slow adoption of cryptocurrency has created a trend of new expectations from consumers. Those who have difficulty with traditional financial institutions (FIs) constraints often find alternative currencies better suited to their personal needs, with peer-to-peer transactions becoming a regular part of ordinary, everyday life.

Instead of writing a check and handing it off for another party to cash or deposit or using a credit card to transfer money from one place to another, consumers have become accustomed to making transactions directly between themselves or through third-party money service businesses (MSBs.)  

What Do Traditional Banks Need To Do To Remain Competitive?

FIs have already adopted some trends to satisfy their customers’ changing needs, including the ability to transfer money between peers using mobile devices. However, high fees for basic services coupled with banking practices, which can include applying debits before credits (causing overdrafts and more fees), have soured many consumers’ relationships with their traditional banking system. 

By embracing cryptocurrency, banks open up innovative ways of remaining viable in the finance industry’s new age. FIs can bring customers back into the fold by offering a new range of features, including cryptocurrency exchange services and crypto loans to individuals, as well as establishing ways to service MSBs.

Establishing BSA/AML/CIP/OFAC Compliance

The potential for FIs and virtual currency MSBs to work side by side already exists, but there is one principal hurdle to getting over MSB compliance with the Bank Secrecy Act (BSA) and associated laws designed to prevent criminal financial activity, money laundering, and the financing of terrorism. 

Many still view virtual currency businesses as inherently risky. This comes mainly on the heels of incomplete infrastructure for and enforcement of anti-money laundering (AML) laws, including Know Your Customer (KYC) rules and Countering the Financing of Terrorism (CFT) guidelines. Before an FI can provide banking services to a virtual currency MSB, a compliance system must be established to address AML and related obligations on both sides. 

For example, FIs must comply with a Customer Identification Program (CIP) requirement, but MSBs do not have CIP obligations. However, MSBs must still be compliant with AML laws, including comparable KYC regulations, which can be implemented as a de facto CIP. 

FIs must also establish Office of Foreign Assets Control (“OFAC”) compliance to avoid completing transactions that include virtual wallet numbers associated with “Specially Designated Nationals and Blocked Persons” (“SDNs.”)  

Crypto and Your Business: What You Need to Know

Accepting cryptocurrencies comes with a certain level of risk and can adversely affect businesses ill-prepared to evolve and adapt to remain compliant with local and global laws. 

What are some of the risks?

The volatile fluidity of many cryptocurrencies and the continual introduction of new currencies into the market through ICOs can make it challenging to stay abreast of appropriate risk mitigation. While the blockchain is increasingly secure–and a supercomputer powerful enough to manage the job of hacking the blockchain has not yet been invented–vulnerabilities can still exist at specific points in the transactional process. Additionally, private keys can be lost, compromised, or stolen. 

How could cryptocurrency be regulated?

With MSBs poised to become accountable to the same types of regulation required by FIs, cryptocurrency adoption is expected to expand rapidly. Your business will have to be compliant with KYC, AML, and CFT rules. New regulations may be put in place to manage altcoins with variable value (similar to bitcoin, which can contain coins considered “tainted” through even distant or remote association with illegal activity.) 

How could it affect your business?

Even though Bitcoin and other cryptocurrencies are highly secured through distributed public ledgers, public perception is still that cryptocurrencies are suspect. Before deciding to accept cryptocurrency, evaluate if the customer subset requesting this option outnumbers those who may look disfavorably at such a practice — and understand the need to educate your target demographic about cryptocurrency safety and security.

What are the specific risks involved in accepting cryptocurrency?

Three primary risks of accepting crypto include a lack of knowledge surrounding how to keep your cryptocurrency safe, the innate vitality of virtual currencies, and regulatory and tax concerns. If you rely on a crypto exchange, you can manage your exposure to the first two but will open yourself up to transaction fees, concerns over liquidity, and counterparty risks. 

What could you do to manage these risks?

Bitcoin and other received currencies can be converted at the end of each day to help mitigate the risk of value fluctuations. You can also explore Bitcoin storage services that add extra layers of encryption and security, such as a secure virtual vault. Finally, consider a cryptocurrency compliance service that can help you navigate ever-tightening cryptocurrency regulations to legitimize it worldwide. 

What Every Company Needs to Know About Compliance

If you are servicing a company dealing in Bitcoin or another alt currency, compliance becomes even more critical. Having a professional who understands the rules and regulations surrounding cryptocurrency examine your relationships and the company’s business practices can help you determine what is required and how to accomplish compliance. 

Why is your customer dealing in Bitcoin?

Finding out why your customer has chosen to deal in Bitcoin is the first step to identifying where and how to implement compliance. 

Identify motives

FIs should be asking business banking customers who accept Bitcoin or other virtual currencies as payment what drove their decisions, following up with steps to verify the response. While virtual currency can be used to fund illegal conduct, this represents only a small fraction of Bitcoin usage. Fully integrating Bitcoin with KYC best practices can provide enhanced security, reduced transaction fees, brand loyalty, and spur business growth.  

Implement compliance

MSBs need to implement an anti-money laundering program based upon an internal assessment of their risks while complying with FinCEN’s record-keeping regulations. Compliance implementation will involve:

  • Register with FinCEN (as an MSB)  
  • Develop, implement, and maintain an AML program that includes KYC compliance.
    • (according to regulations, this program should be designed “to prevent [MSB] from being used to facilitate money laundering and terrorist finance”)
  • Establish record-keeping and reporting measures, including filing the following:
    • Suspicious Activity Reports (SARs) 
    • Currency Transaction Reports (CTRs).

FinCEN also mandates money transmitters to obtain a state license within every state in which they maintain operations or conduct business. While most states define anyone who receives money to transmit that money to another location–by any means–as a money transmitter, whether or not cryptocurrency qualifies as “money” is still in a state of flux and can vary from state to state. Obtaining licensure is the safest and most forward-thinking policy. 

Is Traditional Banking Under Threat from Cryptocurrency—Closing Thoughts

In general, the rise of cryptocurrency has impacted the traditional banking industry much more than was previously anticipated. Even businesses not directly involved in crypto may still face AML/compliance risks. The good news is that there are steps that can be taken to mitigate these risks and avoid regulatory repercussions. By staying informed and proactive, financial institutions can ensure a safer and more secure future for themselves and their customers. The journey ahead may be uncertain, but with the right knowledge, it can also be filled with opportunity and innovation.

How A Technology Content Writer Writer Can Help

If you need a technical writer or technology content writer with a comprehensive understanding of blockchain and cryptocurrencies, don’t hesitate to get in touch. I am ready to help you navigate this exciting and ever-changing landscape.

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