Crypto On Fire, Banking Under Fire

After more than a year in purgatory, cryptocurrencies are back in the spotlight and banks can no longer avoid the subject, as Sheraz Ahmed, who is a Partner of STORM Partners and Founder of Decentral House, points out.

Earlier in March, the Crypto Valley Association hosted its first Crypto Banking Symposium in Geneva. Held in the iconic FER (Federation des Entreprises Romandes), one of French-speaking Switzerland’s largest professional associations, a crowd of 300+ banking, fintech, and crypto community members, along with consultants, law firms, public sector officials, and enthusiasts - spokespeople from all over Europe were present.

The sentiment was higher than Bitcoin’s trading price. When asked what is next for banks, Nicolas Vradis of Canton Neuchatel smiled and said: “Innovate, follow, or die.” The comment was accompanied by grins from the other speakers and the crowd but also by a feeling of surprise and relief. It was as if something the people in the room had known for a long time could finally be said aloud. Change was always going to happen, but the timing was less certain–until now.

Why Is Neuchatel Important? Until recently, this often-forgotten canton was seen as a haven for Bitcoin-centric companies. More than just a hub, Neuchatel brought together the trifecta of government support, commercial support, and financial support–until the Cantonal Bank of Neuchatel (BCN) froze several of their clients' accounts without explanation and then terminated many of those relationships. Software platforms went offline. Employees didn’t get paid.

To play devil’s advocate, we could even say they were probably right to do so, at least from an operational and risk perspective. A combination of their reputation for welcoming emerging tech and a number of startups raising funds via tokens led to a surge in foreign investment. While on the surface, this would seem to be a good thing and the dream of many ministers of finance, it also flooded the bank with anti-money laundering and know-your-client requirements they simply weren’t equipped to handle.

Rather than take the risk, they made a unilateral decision to end the activity, pitching several years of goodwill and compromise out the window with the bathwater. And why not? They were only crypto companies, after all.

How Does Geneva Stand? Some Swiss banks–with offices in Geneva were notably absent. One would have expected Lombard Odier, Pictet, or even UBS, to have a position on the debate. Swissquote and Arab Bank Switzerland were present, having pioneered the first crypto offering in the EU and tailored custody services for HNWIs, respectively, but most of the other banking representatives came from the German-speaking side of the country.

Genevan private banks have notoriously labelled themselves as smart followers, but some might argue that to follow, one must keep an eye on things. In 2023, that might have been the end of the conversation. It is not unheard of in Switzerland for crypto-related companies to be asked to take their business elsewhere. The Cantonal banks are responsible for supporting the region's economic development, not just one niche of it.

When, on 24 January 2024, the BCN made its decision, Bitcoin was trading at CHF 34,589 per BTC. On 6 March 2024, the day of the symposium, BTC had blown through the previous highs to trade at CHF 58,334, casting that decision in a new light. It is generally believed that, because of the approval of BTC exchange-traded funds and the halving event, Bitcoin has room to grow. Since it represents 52.1% of the global crypto market cap, it will likely pull the whole sector higher with it. At the very least, the sting of losing clients with crypto accounts hurt almost twice as much.

But what’s the alternative? After all, the banking world didn’t become this way by choice. Said one former banker, "I grew up wanting to be a banker. Why would you want to be anything else? You had the money, the lifestyle, the risk? You’d live an incredible life and retire at thirty-five. That was the promise." The 21st Century dealt a series of blows to the banking profession, starting with the obliteration of banking secrecy post-9/11, the global call for accountability in light of the 2007-2008 financial crisis, and the dismantling of corporate shell games in the aftermath of the Panama Papers. Over the course of 20 years, being a banker shifted from too much risk to no risk at all.Meanwhile, the consumer has moved on.

Said Elodie Trevillot of French bank Delubac & CIE, "In France, there are only eight million people with structured product portfolios. There are nine million with crypto wallets." Meanwhile, the city of Lugano issued its second digital-native bond, settled via Central Bank Digital Currency.Web3 is, by design, a tool that transfers power from organizations to individuals. "There are some fintechs that are leading development,” said Paolo Bortolin of Lugano. “They will take the market. If the banks try to come later, the market will have moved beyond them."

Vincent Subilia, director of the Geneva Chamber of Commerce (CCIG), added, “We don’t want the banks to be the bottleneck in the success story we are writing together." The message was clear, and the bankers in the audience nodded along. It was time to follow smartly or fall behind.Finding A Middle GroundIn the United States, a somewhat blatant attempt by the SEC to squeeze small players in order to make room for Blackstone, JPMorgan, and Fidelity’s of the world has resulted in a flight to better climates.

The UAE’s crypto-friendly free trade zones have opened their doors to digital asset exiles, while Switzerland generally offers a regulated but protective environment. US crypto giant Circle, who mints the USDC dollar-backed stablecoin, has successfully gained French regulatory approval. Said Guillaume Chatain of Société Generale’s FORGE, “What is happening right now with the SEC means that innovation is not going to come from the US.”

It’s a simple application of regulatory arbitrage at the national, corporate, and individual levels, but the biggest players might lose for once.But that doesn’t mean we can’t all be friends. AMINA Bank and Sygnum Bank both presented collaborations with traditional banks to gently bring them into the new paradigm–including the Zuger Kantonalbank.A quick look at the most recent successful fundraises in the Web3 space shows that white-labeled institutional crypto trading platforms are finding significant investments.

Compliance, KYC, and AML solutions were also at the fore, especially since newly-made crypto fortunes typically seek safer harbours in the traditional world.The Cantonal Bank of Zug spoke of consumer demand, not arising from the under-20 cyberpunk crowd but instead from wealthy and established older investors who want to diversify their portfolios without a lot of fuss. It might even be an opportunity for bankers to be bankers again–even though they may do it under very different circumstances.

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