When London-based Barclays Bank announced that it would become the UK’s first high-street bank to accept Bitcoin, the move lent a great deal of much-needed credibility to the cryptocurrency market.
In a bold move into the crypto sector, Barclays agreed in 2018 to provide banking services to San Francisco-based Coinbase, one of the top ten cryptocurrency exchanges, which reportedly had over half a billion dollars in revenue.
However, now the bank has changed its mind announcing in August 2019 that it was parting ways with Coinbase. Both parties remain tight-lipped about what motivated the decision.
While we can only speculate about the reasons for this reversal, the most common theory is that Barclays was worried about increasing regulatory scrutiny and wanted to keep its political powder dry for other battles. In crypto circles, analysts have also pointed out that Coinbase had wanted to expand the range of cryptocurrencies on offer, which may have caused Barclays to worry about the costs and complexity of screening each new crypto asset.
[click_to_tweet tweet=”‘Regardless of why the decision was made, this case highlights an ongoing communication gap between blockchain and banking that needs to be bridged if the fledgling industry is to realise its full potential’ – INITIUM Group CEO Daniel Spier” quote=”Regardless of why the decision was made, this case highlights an ongoing communication gap between blockchain and banking that needs to be bridged if the fledgling industry is to realise its full potential. “]
In fact, Coinbase is not an isolated case: a study by industry body CryptoUK found that three quarters of cryptocurrency businesses in Britain are forced to conduct their banking overseas because they have been refused service domestically. But the issue is not confined to cryptocurrencies, it affects the entire blockchain sector. UK regulator the Financial Conduct Authority has observed a tendency for banks to refuse to serve businesses which use distributed ledger technology (DLT), regardless of how it is used.
Compounding the problem is a lack of understanding of blockchain technology in much of the mainstream financial press. Most reports concentrate on cryptocurrencies, particularly Bitcoin, and whether they represent real value or constitute a good investment. While this is an interesting and legitimate debate, it fails to convey the broader use cases of blockchain technology — in the logistics, supply chain management, healthcare, government and energy sectors to name but a few. In addition, there is a degree of institutional inertia among some legacy banks, which continue to employ risk models that are poorly suited to assessing niche and emerging industries like blockchain.
But to some extent, this knowledge gap is understandable. The blockchain sector has not always been effective at explaining itself to the banking “establishment”. Banks do not shun paying customers lightly, but the hype and bluster of the ICO boom coupled with an impenetrable wall of technical jargon has made it difficult for them to see the wood from the trees.
From a bank’s perspective, there is a huge difference between a utility token on a digital platform and an asset-backed token in real estate, for example. The underlying assets are fundamentally different and involve different levels of risk. However, crucial distinctions like ICO and STO get buried in a sea of other less relevant (from a banker’s perspective) acronyms and technical jargon. This serves to confuse rather than reinforce the central business case for deploying the technology.
In order to move forward, two things need to change. Firstly, the blockchain and banking sectors need to engage more with each other — as partners rather than adversaries — and create a shared understanding of the roadblocks to adoption. Secondly, banks need to develop new risk models to properly account for the nuance and multifaceted nature of emerging technologies like blockchain. If the communication gap can be addressed, Britain can build an innovative, stable and compliant blockchain sector ready to compete on the global stage.
Daniel Spier is the CEO of INITIUM Group, an international bank specialising in corporate banking services for the new digital economy.