Banking on the banishment – Is crypto de-banking causing more harm than good?

October 10, 2023

Written by Mark Winters, an Operating Partner and Becky Cooper, a Junior Associate Operating Partner.

The cryptoasset industry has been disrupting the trad-fi sector for the better part of the past 10 years. However, recently there has been a gradual yet increasing trend of so called “de-banking” and “de-risking” of cryptoasset business by UK banks. In short, these terms refer to the actions taken by banks to limit or terminate relationships with and to cryptoasset businesses, usually owing to perceived risks particularly with regards to fraud, money laundering and / or terrorist financing.

Cryptoasset de-banking refers to the phenomenon involving traditional banks and financial institutions severing ties, or limiting relationships, with new or existing cryptoasset businesses and, in some cases, preventing individuals from being able to transact in cryptoassets.

Cryptoasset de-risking is a slightly broader concept that involves financial institutions minimizing exposure to potential risks, which often in turn leads to de-banking. In the context of the cryptoasset industry, de-risking often occurs where financial institutions, such as banks, decide to distance themselves from the cryptoasset sector typically owing to actual and or perceived regulatory, financial or reputational concerns.

Whilst the UK government have described the UK as a “crypto hub”, cryptoasset de-banking and de-risking are presenting significant challenges to the UK’s cryptoasset ecosystem. In particular, the lack of banking infrastructure for cryptoasset businesses is posing a threat to the industry’s ability to develop and thrive.

Whilst de-banking and de-risking has its utilities and, in particular, can be a useful and effective method in addressing, for example, money laundering concerns, the benefits need to be carefully considered against the potential drawbacks of stifling the cryptoasset industry’s development within the UK. Historically we have also seen that de-banking can be more of a hindrance than a help and in fact in 2015, a number of banks de-banked Money Services Business which in turn pushed the flow of the business to less regulated routes.

Additionally, whilst historically banks preventing individuals from funding accounts held with cryptoasset firms may have been considered a proportionate approach to consumer protection, following the entering into force of the new financial promotions rules on 8 October 2023, the retail market wishing to transact in cryptoassets are subject to a number of measures designed with consumer protection in mind. For example, first time retail clients wishing to participate in cryptoasset investments will be subject to, for example, appropriateness assessments and a 24-hour cooling off period. As such, the de-banking measures taken by banks now seem out of step and disproportionate and in fact could be encroaching on the general public’s ability to access an exciting asset class.  

Whilst it is clear that the cryptoasset industry poses a number of risks that must be taken seriously, there should be a way forward that does not simply involve de-banking all cryptoasset business. Perhaps instead there should be a more considered and concerted effort between banks and cryptoassets businesses to establish and foster a more informed, compliant and collaborative environment that strikes a proportionate balance between effective regulatory compliance and innovation. 

The specialist cryptoasset team of gunnercooke llp are engaging in ongoing dialog with the UK Payment Services Regulator to address the concerns of our clients with regard to wholescale de-banking and de-risking in this sector.  If you have any further evidence or thoughts, and you would like to share with us to aid this effort, please get in touch with one of the team.

If you would like to contact Mark, click here.