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Stefan Deiss, founder and CEO of the Swiss crypto accelerator, Blockchain Propulsion, spent two months looking for a bank account for Polo Pecem, the world’s first blockchain-powered “Smart Chain City,” one of the companies under his wing. “That’s a long time in the life of a startup,” he said to Decrypt.
That’s why Deiss, and countless others, are cheering the launch of Switzerland’s two new crypto asset banks, Zug-based Seba and Zurich-based Sygnum. The crypto banks, which are aiming to serve asset managers, regular banks and startups, will now be regulated, just like other financial institutions. In August, the Swiss regulator, FINMA, granted Seba and Sygnum provisional banking and securities licenses.They are the first such licenses granted anywhere in the world, and will enable the banks to integrate cryptocurrency into a wide range of services—deposits, withdrawals, lending and investing.
Perhaps most important, they will fill the void in banking services for crypto traders and entrepreneurs, who are regularly denied and locked out of bank accounts because of the risky reputation of crypto companies.
Dedicated crypto banks are nearly here
“It’s a great move for Switzerland, but also for other countries around the world, because now you have banks that are specialized in crypto,” said Deiss.
Blockchain Propulsion has hubs around the world. It helps its startups raise capital, and can help domicile clients who operate in less favorable jurisdictions in Switzerland. But Deiss hasn’t yet decided which of the two new crypto banks to recommend to his clients. Neither Seba nor Sygnum has yet been permitted to publish its prospectus.
Once they’re fully licensed, which is expected within a month, they’ll be able to issue, store, trade and manage cryptocurrency, such as bitcoin and ether, and convert fiat currencies to crypto. They could also offer custody, brokerage and tokenization services for digital assets to qualified investors and institutions.
The provisional award has opened the floodgates for other companies in the region, such as veteran crypto financial services provider, Bitcoin Swiss, which is now hoping its applications to become digital will be accepted. However, the process is lengthy.
“What’s important is that Switzerland is able to maintain its advantage in the crypto/blockchain sphere,” he added.
Europe’s crazy quilt of regulations
Switzerland has been one of the main players leading the global adoption of tokenized digital assets and DLT. Indeed, Europes banking hub is also preparing to host Libra, the digital currency proposed by Facebook. Some say it threatens to upend the very foundations of the world’s banking system.
But competitors have been biting at its heels.
Germany, Liechtenstein and Luxembourg have all taken steps towards adopting distributed ledger tech, but none has yet licensed a dedicated crypto bank.
The tiny nation of Malta, keen to become “blockchain island,” has been busy introducing legislation that favors crypto companies, but its startups are finding it hard to obtain banking services.
To remedy this, Malta-registered RnF Finance, founded by former Agribank CEO Roderick Psaila and backed by the OkEx exchange, applied to the Maltese financial regulator for a license at the end of last year. If granted, the permit would allow it to perform a range of financial activities, including lending, payment and custodian services.
But, as yet, the Maltese regulator has not yet issued a single licence.
“Licenses will not be something that is automatic, they will not be given out easily, it is a very robust process,” said Ian Gauci, co-founder of Malta’s Caledo agency, which provides legal, and technical services for crypto clients to help them obtain a license, told Decrypt back in May.
Unlike Switzerland, Malta is a member of the European Union, whose members must abide by common rules governing the movement of goods and services. And there are signs that within the E.U., regulatory noose around cryptocurrencies is tightening.
January 2020 is the deadline for members to enact the European Union’s Fifth Anti-Money Laundering Directive and many countries have used the legislation to beef up their regulations and make them even tougher than the directive requires.
In Germany, for instance, digital asset exchanges and providers of crypto payment and custodian services must now apply for licenses from the financial regulator, potentially limiting services that have so far been readily available to the crypto community.
Banks are hooking up with with crypto firms
But partnering with a bank can be a way for crypto companies to cut through the red tape, and offers advantages for banks too.
Pioneering German crypto bank Bitwala partnered with European Union-regulated SolarisBank in October 2018, a move that ensures its account holders are able to use Bitwala’s services just like a regular bank account—to pay bills, exchange currencies, and send interbank payments. It also means that, just as with Germany’s traditional banks, deposits of up to €100,000 ($110,000) are protected by the German Deposit Guarantee Scheme.
“Bitwala was first to offer a fully compliant and convenient banking service as a bridge for everyone,” Christoph Iwaniez, the startup’s Chief Finance Officer told Decrypt. “We believe that more services around blockchain-based financial services will follow. This is, in our opinion, the most promising way to open the cryptosphere for mass adoption.”
In August, Bitwala launched the first mobile, bitcoin banking app on iOS and Android. The app combines a bank account, bitcoin wallet, and a trading and debit card. Its innovative features include the ability to sign off on transactions with biometric identification.
Iwaniez argues that most, if not all, traditional banks “are clearly lagging way behind in the technical development in blockchain technologies.” And it’s only through partnering with crypto firms that they can close the technology gap and gain know-how as well as access to the crypto markets and the community. Better regulation, he believes, will not be a hindrance, it will be the trigger.
Banks are now more likely to seek partnerships with licensed crypto banks, rather than trying to transform themselves into crypto banks, said Diess. Private, Swiss investment bank Julius Berne, which recently partnered with Seba, is a case in point.
“Now that you have two specialized crypto banks opening up soon, the traditional banks are probably not going to be called on to open up accounts for crypto companies,” he said, speculating that “it is too late in the game” for legacy banks to get into crypto themselves.
Still, there’s little doubt that banking will start to incorporate blockchain in banking services, according to Anne Boden, a doyen with 30 years experience in some of the world’s most important financial institutions, and founder and CEO of “challenger bank” UK-based Starling,
But she added that banking is an industry of such magnitude, which is so legacy-based, that it would be foolhardy to overhaul the entire system for a nascent technology.
The U.S. is lacking in short-term plans
Despite calls from the IMF, among others, that central banks should innovate to avoid being left behind, the American financial sector has fewer short-term plans to build out the new types of money-transfer systems like those that are being developed in Europe and beyond.
But the U.S. Federal Reserve is mindful of the threat posed by upstart banks that have gained strong momentum. In August, it announced plans to launch its own fintech real-time payments system “FedNow” within five years. The idea has been slammed by experts, including the Bitcoin-friendly former congressman and presidential candidate Ron Paul.
The U.S. has gained a reputation for strict regulations, and strict punishments for projects that fall afoul of the rules. Yet the New York Department of Financial Services—arguably the strictest regulator in the world—has, since 2018, allowed some cryptocurrency companies to offer bank-like services.
And there’s now a new and growing class of financial instruments surging in popularity in the U.S.
DeFi services are increasingly mimicking banking
In particular, investors have been crying out for solutions that will balance security and the ability to quickly move crypto assets for trade. To meet growing demand, the lines have been blurring between fintech banking, cryptocurrency exchanges and digital wallets. And some of the largest crypto firms, such as the Coinbase exchange, have been able to offer bank-like services for enterprise-level businesses.
Coinbase Custody provides those with large crypto holdings with services including segregated cold storage, integration with the Coinbase Pro exchange, insurance for deposits, staking tools, customized reporting and third-party auditing. In August, Coinbase announced that it was beefing up the business and buying the "custody" arm of rival Xapo, in a bid to attract big investors, such as hedge fund managers and mutual fund managers.
But, essentially, it’s an investment fund. It can only play at banking until the Securities and Exchange Commission grants it leave to integrate with the banking system. Meanwhile, it falls under the remit of the New York Department of Financial Services.
DeFi is not banking. It’s unable to offer the security that banks are valued for. But in the absence of other alternatives, increased competition among these quasi-banks has led to new ways to store assets.
Similar custodian services are offered by Andreessen Horowitz-backed startup Anchorage and Fidelity Digital Assets, and, on Tuesday, the Winklevoss-owned Gemini exchange entered the fray, announcing Gemini Trust, a custodian service which will allow users to instantly trade 18 types of cryptocurrencies from offline storage.
In Germany too, custody solutions, are increasingly in the spotlight. Moves, by the German regulator, to license crypto companies offering these types of services, were discussed at its BaFin Tech 2019 conference in Berlin on Wednesday.
But DeFi is not just about custody, it also offers plenty of other ideas to reshape banking, lending, and derivatives. It will be especially valuable in emerging economies where people are already using crypto to hedge against local fiat currency fluctuations, said Iwaniez.
Crucially, those who might be turned away by traditional banks will now have another alternative; they need no longer go, cap in hand, to a traditional bank if they need financing. And integrated economies with the most liberal banking authorities will benefit most.
Mindful of this fact, U.S. officials this week pressed Swiss regulator to ensure that its regulations are robust enough to withstand abuse. But on Thursday, FINMA head Mark Branson told the Swiss paper Neue Zuercher Zeitung he was ready for the challenge:
“If a financial center has ambitions, it must be able to live with attention,” he said. It’s certainly going to get a lot of that in the coming days.