The Relationship Between Banks And Cryptocurrency

Physical Gold Bitcoin Coin against graphics, dots and flares.

Sometimes new things supersede the old, but sometimes they rival each other, and not always because of nostalgia. A remarkable case in that regard involves the crypto market and traditional banking. The banking system and by large the traditional capitalist economic model have been seen as rivals of the crypto market, similar to the acrimony between communism and capitalism during the Cold War.

Crypto advocates would confirm that the likes of Bitcoin were created to address perceived shortcomings of the traditional financial system, without relying on banks and institutions. The accessibility and popularity of crypto have been bolstered recently by the emergence of automated crypto trading software, such as quantum ai and many others.


Ties to Traditional Finances

At present, the relationship between banks and the cryptocurrency market is complex. As per Bloomberg, numerous crypto firms depend on traditional financial institutions to offer customers a smooth on-and-off ramp between their platforms and the world of fiat currency. In the US, Silvergate Capital, Signature, and Metropolitan Bank previously served as primary processors for USD deposits in the crypto market, until their downfall. This has sparked a debate on whether cryptocurrency bears responsibility for the banks’ failure, with conflicting opinions from different experts.

CoinDesk supports Bloomberg’s view that there is a strong link between crypto and traditional finance. According to the site, crypto firms can’t handle fiat currency without having ties to a U.S. bank. Nonetheless, CoinDesk pointed out that since U.S. dollars are not very fluid in the crypto market, digital firms do not require lending products from traditional banks. It’s possible, though, that in the coming years, these firms will manage without bank ties.


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US Banks and Cryptocurrency

Cryptocurrency’s rising popularity caused a love-hate dynamic to emerge, with regulators making major decisions linked to it, starting from 2021.

In January 2023, three prominent US regulators, the Office of the Comptroller of the Currency, the Federal Reserve, and the Federal Deposit Insurance Corporation, expressed their concerns about the non-alignment of crypto transactions with safe and sound banking practices. The White House also emphasized the need to segregate hazardous digital assets from the banking system.

Federal Reserve Governor Christopher Waller stated in February 2023 that banks that plan to engage in activities related to crypto-assets must not overlook complying with the ‘know your customer’ and ‘anti-money laundering’ requirements. These regulations are critical for banks to follow.

During that time, The Wall Street Journal divulged that banks were withdrawing support for crypto firms, concerned about the potential for stricter regulations that could separate digital currencies from the real-world financial system. This situation didn’t escalate to the worst-case scenario, and digital currencies remained connected to conventional financing. However, a lingering effect remained.


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EU Banks and Cryptocurrency

A similar approach occurred in Europe. Most banks under the supervision of the European Central Bank have so far been cautious about crypto-assets. Not long ago the Switzerland-based Basel Committee on Banking Supervision (BCBS) adopted a standard to handle bank crypto assets.

The BCBS standard divides crypto-assets into two groups. The first is tokenized traditional assets and crypto-assets with effective stabilization mechanisms (stablecoins). The second includes all other crypto assets. This includes stablecoins with ineffective stabilization mechanisms and the so-called unbacked crypto-assets such as Bitcoin.

Although the second group is considered riskier, it includes crypto assets that meet certain hedging recognition criteria. In such cases, the European guidelines permit a certain degree of hedging.

The relaxation of regulatory limitations on cryptocurrency remains uncertain. Nonetheless, the expansion and proliferation of digital technologies will undoubtedly impact the situation in some capacity.