Banks are Moving Away from Cryptocurrencies

Banks are understandably risk averse, so it’s not surprising to see them hesitate to get involved in cryptocurrency markets given cryptocurrency’s sometimes speculative and unpredictable characteristics. Big banks are good at making money the way they always have, taking in bank deposits and loaning them out to borrowers, making money off the spread between the rate they offer for savings and investments and the rate they make on mortgages and other loans. Cryptocurrency is tantalizing, but banks are unsure how to capitalize on this new opportunity.

Halting Credit Card Transactions

Over the past several months the number of users of Coinbase has skyrocketed into the multi-millions. In November the number of Coinbase users eclipsed those of Charles Schwab, marking cryptocurrency’s newfound prominence in the public eye. Fueling this growth is Coinbase’s simple interface which allows users to buy Bitcoin, Ethereum, Litecoin, and Bitcoin Cash with a credit or debit card. But earlier this year many large banks such as Bank of America, JPMorgan Chase, and Citi all banned their customers from purchasing cryptocurrencies with credit cards.

Their reasoning is fairly simple. The massive price gains of cryptocurrencies spurred many novice investors to buy them on credit, with the expectation that price movement would continue upwards. With prices crashing more than 50 percent in January from all-time highs, some investors may be stuck owing more to their credit card lenders than their cryptocurrencies are worth. Such a situation means a higher risk of default and increased risk for banks.

Preventing Money Laundering and Other Problems

Big banks moving away from cryptocurrencies is also in response to fraud claims and money laundering issues. By stopping credit card payments, these banks are cutting off a popular route for money launderers and introducing some regulation to a largely untamed investing environment. Thieves who create bogus credit card accounts or steal legitimate accounts could potentially create a treasure trove of cryptocurrencies for themselves. Banning credit card usage removes an easy way for those thieves to score big payoffs.

Banks Enjoy Assessing Fees

Skeptical investors might scoff at the big banks positioning themselves as protectors in terms of their credit card bans and concerns about money laundering. The skeptics understand that banks make money off of fees. Banks charge fees for nearly any transaction — in some cases just for holding onto the customer’s money. But with such a fee arrangement does come a level of trust. Customers can trust a big established bank to securely hold their money, act as a payment processor, offer mortgages, and even pay a small amount of interest on some investments. The problem comes with events such as the 2008 financial crisis, which exposed fundamental problems with the banking industry’s business model and structure.

Bitcoin and other cryptocurrencies are unique financial instruments because they do not require a trusted “go-between” to manage the transaction. The blockchain is immutable and transparent, so the community at large can spot issues and fraud. It’s completely opposite from how banks operate, and therefore causes great concern in the banking industry. Cryptocurrencies represent possible obsolescence for banks, and unsurprisingly financial institutions are working closely with governments to slow down cryptocurrency adoption while simultaneously seeking to figure out how to harness cryptocurrencies for their own benefit.

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