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Introduction to Indirect Banking in the Crypto Industry

Esteban Gamboa, Senior Compliance Officer for SolutionsHub, discusses the role, benefits, and challenges of banking intermediaries for the crypto sector.

The sector has encountered substantial obstacles in accessing conventional banking services. Regulators warnings and failures have made many banks hesitant to collaborate with cryptocurrency clients. However, some intermediaries have emerged to assist, enabling banking services through indirect banking arrangements.

Intermediary Types

There are a few alternative names and related concepts for intermediaries in the context of banking and financial services. Some of these include:

Virtual IBAN provider: A virtual IBAN (International Bank Account Number) provider offers clients unique virtual account numbers that can be used to send and receive payments, making transactions more efficient and secure. These providers can be considered as intermediaries between traditional banks and clients, especially in the context of cross-border transactions.

Challenger bank: A challenger bank is a relatively small, digital, and technology-driven financial institution that competes with traditional banks by offering innovative products and services, often focusing on specific niche markets or underserved segments. While not exactly a intermediary, a challenger bank can provide alternative banking services to crypto firms that may have difficulty accessing traditional banking.

Payment service provider (PSP): A PSP is a company that facilitates electronic payment processing for businesses, usually offering a variety of payment options, such as credit cards, bank transfers, and digital wallets. PSPs act as intermediaries between merchants, banks, and customers, ensuring smooth and secure transactions.

Fintech company: Fintech companies leverage technology to offer innovative financial products and services, often addressing gaps left by traditional financial institutions. Some fintech companies may act as intermediaries in certain contexts, providing alternative banking solutions, payment processing, or other financial services to clients, including those in the cryptocurrency industry.

Role of Intermediary Companies

Intermediaries offer services connecting banks and their clients. In the context of digital asset clients, these intermediaries store cash on behalf of their clients in their bank accounts or liaise with banking partners to obtain accounts in their clients’ names.

Furthermore, they offer a variety of other services, including compliance monitoring, anti-money laundering checks, and additional regulatory compliance support.

Importance of Indirect Banking in Crypto

The significance of indirect banking has grown pronounced in the cryptocurrency sector due to the limited number of banks prepared to cooperate with digital asset companies.

Banks have been extremely cautious about collaborating with cryptocurrency clients because of concerns about fraud, money laundering, and other regulatory matters.

This has created a considerable barrier to entry for numerous digital asset enterprises. leading to the emergence of intermediaries as a crucial element of the industry’s infrastructure.

Services Provided by Intermediary Companies

Intermediaries deliver a variety of services that assist digital asset clients in accessing banking services.

One key service provided by these firms is access to bank accounts.

Intermediary companies have established connections with banks willing to work with digital asset clients, enabling them to help clients open bank accounts and provide ongoing support to ensure that the accounts remain in good standing.

In addition, intermediaries offer services that aid cryptocurrency companies in managing their finances. For instance, they can help clients manage their cash flow by providing cash management services, such as overseeing incoming and outgoing payments.

They can also grant access to credit facilities and other financial products that assist clients in growing businesses.

Compliance and Regulation Challenges in Crypto

Regulatory compliance is one of the most significant challenges facing the cryptocurrency industry.

Digital asset companies must adhere to regulations, including anti-money laundering (AML) and know-your-customer (KYC) requirements. Failure to comply with these regulations can result in severe penalties and even criminal charges.

Intermediaries play a vital role in assisting digital asset clients in navigating these regulations. They offer compliance monitoring services and aid clients in establishing and maintaining clear AML and KYC processes.

Furthermore, they work closely with regulators to ensure that their clients comply with all applicable regulations.

Future of Indirect Banking in the Crypto Industry

As the cryptocurrency industry continues to evolve, the role of intermediaries is likely to become even more crucial.

The limited number of banks willing to work with digital asset clients means that these firms will remain a critical component of the industry’s infrastructure.

As the industry matures and regulatory frameworks become more established, banks may become more comfortable working directly with cryptocurrency clients.

However, it is also possible that the regulatory environment will become more complex, making it even more challenging for cryptocurrency firms to access banking services.

In this scenario, the role of intermediaries would become even more critical, and we could see the emergence of new types of intermediary firms that specialise in different aspects of the industry.

Benefits and Risks of Indirect Banking for Crypto Firms

Many cryptocurrency firms operate in a highly competitive and sensitive environment, and the ability to keep their financial transactions private can be a significant advantage.

Furthermore, intermediaries provide a level of expertise and knowledge that may be lacking within the cryptocurrency industry.

These firms have experience working with banks and regulators and can provide invaluable advice and support to their clients.

However, while there are many benefits to indirect banking, there are also risks involved.

One of the biggest risks is the potential for fraud or mismanagement of funds.

Cryptocurrency firms are entrusting their funds to third-party companies, and there is always a risk that these companies may act inappropriately.

Furthermore, while intermediaries provide compliance support, the ultimate responsibility for compliance lies with the cryptocurrency firm itself. Failure to comply with regulations can result in significant penalties and legal issues.

Finally, there is the risk that the relationship between the intermediary and the bank may break down. If the bank decides to stop working with the intermediary, the cryptocurrency firm may lose access to its banking services.

Regulatory Challenges Facing Indirect Banking in Crypto

The cryptocurrency industry presents significant challenges for indirect banking. Regulators are concerned about the potential for fraud, money laundering, and other illegal activities, and they are closely monitoring the activities of cryptocurrency firms and intermediaries.

In some cases, regulators have taken action against intermediaries that they believe are not complying with regulations.

For example, the US Securities and Exchange Commission (SEC) has charged numerous intermediaries with operating unregistered broker-dealers in the cryptocurrency industry.

These regulatory challenges make it critical for intermediaries to prioritise compliance and risk management. Companies that are not able to meet regulatory requirements may find it difficult to survive in the industry.

Adapting to Challenges and Opportunities in Indirect Banking

Indirect banking is a critical component of the cryptocurrency industry, allowing digital asset clients to access banking services despite the reluctance of many traditional banks to work with the industry.

Intermediaries provide a range of services that help cryptocurrency firms manage their finances, comply with regulations, and grow their businesses.

However, there are risks involved, and it is critical for cryptocurrency firms to carefully evaluate the benefits and risks of using indirect banking services.


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