UK Banks Start Banning Coinbase Transactions Amid Regulatory Concern

Even though several banks globally have managed to include cryptocurrency transactions in their framework, UK banks have been quite reluctant to ban crypto transactions amidst regulatory concerns. For example, UK banks’ losses to investment scams rose 42% to 135.1 million Euros in 2020.

In particular, Binance Markets Ltd recently received a formal warning from the Financial Conduct Authority (FCA) that banned it from operating in the UK. Following the trend, many UK banks have decided to stop customers from making payments to crypto trading platforms like Coinbase. The crypto community has found itself stonewalled as UK banks start banning crypto transactions due to regulations from the FCA. The key reason for the crackdown might be a sharp increase in crypto investment scams and money laundering schemes on banks.

Why are UK Banks Banning Coinbase Transactions?

The UK was once the largest market for Coinbase in Europe, and Coinbase’s customer base in the UK was growing at twice the rate of elsewhere.

Coinbase became the first cryptocurrency exchange for making good use of Britain’s Faster Payments Scheme (FPS), a network used by the traditional financial industry. The FPS enabled users to withdraw and deposit British pounds at Coinbase instantly. However, after terminating the relationship with Barclays, it disrupted Coinbase’s access to FPS, which slowed deposits and withdrawals in GBP for UK customers.

UK banks have been reluctant over the years to indulge in business with companies that handle bitcoin and other digital coins. That’s because of concerns that criminals take advantage of the companies to launder money and that regulators are determined to crack them down ultimately.

Regulatory concerns are what are driving UK banks to ban crypto transactions. For this reason, even big lenders in the craze have limited their customers’ ability to buy cryptocurrencies, fearing a plunge in their value will leave customers unable to repay debts. These regulatory fears come despite the growing interest in both digital currencies and the technology behind them.

Before the ban, Coinbase’s UK-based customers believed that having domestic GBP payments with UK banks reduced costs, improved customer experience, and made transactions faster. On the other hand, it seems that regulatory concerns about money laundering and scams by criminals in the crypto realm outweigh the benefits mentioned above.

HSBC recently joined the race by announcing that it won’t allow transfers from digital wallets and enable customers to buy shares in companies associated with cryptocurrencies, such as Coinbase.

Nevertheless, a bank like HSBC feels that cryptocurrencies are high risk and justify a cautious approach; still, they feel that their stance could change if and when regulation evolves.

UK Banks Face Zero Tolerance

The caution from some UK banks didn’t just come out of the blues. It trails back from the 2012 recommendations of the Financial Action Task Force, a G7 initiative geared towards defeating money laundering. In particular, the recommendations require that all states apply measures requiring all UK banks to scrutinize customers’ transactions for money laundering and terrorist financing.

One of the recommendations necessitates the anti-money laundering framework to apply it based on perceived risk. In Layman, if a Coinbase transaction is perceived to be more risky than usual, it needs closer scrutiny by the UK banks to ensure compliance with the framework.

These recommendations force bank resources to verify that a transaction is safe to continue. On the other hand, the banks also face hefty fines for non-compliance where there are deficiencies in implementing the framework or if things go wrong.

For example, the US authorities fined HSBC $1.9 billion in 2012 over significant compliance breaches in the UK. Even though the charges relate to traditional money-laundering compliance breaches, perhaps it goes some way to explain the caution of UK banks amidst regulation.

Banks consider cryptocurrencies as risky due to the potential of being used for money laundering and because their value can be volatile in the short term. For this reason, the UK’s Financial Conduct Authority has already issued a warning that those investing and dealing with cryptocurrencies are at risk of losing all their funds. Mitigating the enhanced burden of investigating businesses and individuals dealing with digital assets makes it easier for UK banks to avoid the risk and not engage with them at all costs.

Banks get entirely bound by anti-money laundering and anti-fraud measures as well as customer protection. It’s both quite tricky for banks to spot and impossible to reverse fraudulent crypto transactions, at least until the market establishes itself.

It does not mean that UK banks have necessarily made the right call because the leading US banks have taken a different approach suggesting that they think the potential rewards are worthy of the compliance burden.

Risks From Non-Compliance Queries

Even though there is a risk of significant losses with cryptocurrency transactions, there is also clear potential for substantial gains. Banks are profit-making businesses; they can leverage returns from crypto investments and utilize the very bullish forecasts in a frenzy, which ought to prompt them to venture into the area, regulatory burden on the side.

UK banks face criminal sanctions, including hefty fines, if they fail to implement the rules correctly. Especially when it mainly turns out troublesome and almost impossible for a bank to identify what a suspicious crypto transaction looks like.

If there is no guaranteed high return for UK banks, it becomes more accessible to de-risk and not engage with Coinbase transactions. However, it depicts a missed opportunity for UK banks and a potentially unnecessary stifling of their growth, especially those wishing to deal with cryptocurrencies.

Conclusion

We could blame UK banks for not doing enough to help these Coinbase transactions or being too cautious. Nonetheless, it simply overlooks the more prominent design flaw in the anti-money laundering framework and compliance measures, which significantly drain a bank’s resources, especially where transactions are considered high-risk.

UK banks are not villains, but it’s a legal issue that requires the attention and intervention of lawmakers. They need to address the fact that it is much easier for banks to de-risk than to comply with the rules and help the banks grow.

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