Recently, I wrote about the shutdown of stablecoin, Basis. Like many other projects, Basis was impacted by the SEC’s latest guidance. But instead of trying to wade through the bureaucracy and sacrifice their principles, Basis’ founders decided to abandon the entire project and walk away from the $133 million they had worked hard to raise from investors.
Commenting on the increasingly stifling regulations on crypto-related businesses, I suggested that companies should go where they’re wanted. Surprise, surprise, that’s exactly what we’re seeing more projects do.
Just recently Lamassu, the world’s oldest Bitcoin ATM manufacturer, moved its business to Switzerland in order to operate in a more crypto-friendly regulatory environment. But this move had nothing to do with the SEC’s attempts to regulate Lamassu’s business. Instead, it was a totally different set of regulatory hurdles that had Lamassu running.
Read on in today’s article to learn what pushed well-reputed Lamassu over the edge, and why this issue will likely impact any crypto-related business.
Lamassu is the company behind the first-ever Bitcoin ATM, which has since expanded to support a wide variety of cryptocurrencies. Today, more than 10% of all Bitcoin ATMs in use are manufactured by Lamassu.
But despite being a relatively long-standing player in the industry, the company continues to face the typical struggles that all crypto-related businesses must endure. In announcing the move to Switzerland, Zach Havey, Co-founder of Lamassu, noted that the company had been facing a number of regulatory obstacles, not the least of which was banking.
Havey made it apparent just how difficult it had become for Lamassu to continue operations: “I mean, we’ve been bankless for the past year. We must have been rejected by 15 banks just because we manufacture terminals for Bitcoin.”
And that’s what makes this case especially interesting. Lamassu is merely a Bitcoin ATM manufacturer, it does not store or trade cryptocurrency as an exchange. Lamassu just produces hardware. Yet the mere association with crypto is enough to make the international banking industry nervous.
Why is it that banks across the world are so reluctant to work with crypto-related businesses? How is it possible for unreasonable KYC and AML regulations in the US to impact foreign banks? Well, it all comes down to a little thing called correspondent banking.
You see, in order to send and receive US dollars, all banks throughout the world need to partner with a US bank that’s licensed to manage and handle those US dollars. These are known as correspondent banks.
These correspondent banks are the lifeline of their foreign banking partners who rely heavily on transactions in US dollars. Without a correspondent bank to facilitate US dollar transactions, a foreign bank would be out of business quicker than its clients can say, “We don’t want pesos!” So understandably, foreign banks are willing to do nearly anything to satisfy their correspondent banking partners requests.
Now, while US regulators may not have direct control over foreign banks, they do have control over US correspondent banks. And US banks providing correspondent banking services are responsible for ensuring that their foreign banking partners utilize certain KYC and AML procedures.
If a foreign bank falls out of line with KYC and AML compliance, their correspondent banks are required to close their accounts — and thus cut off their access to the US financial system and US dollar transactions.
If the correspondent bank does not shut down its non-compliant foreign banking partners, it will itself be shut down by US regulators. So you can see that for a correspondent bank to provide services to a foreign bank, it must be 100% certain that the foreign bank is complying with the required KYC and AML.
With their businesses on the line, banks (both in the US and abroad) have zero appetite for risk. And this fear is transmitted all the way down to low-level compliance officers, who are told that even one error can result in the bank being shut down.
Banking compliance officers are already known for being pencil-pushing bureaucrats with significant risk aversion. But when it comes to taking the unknown risk associated with crypto-related businesses and potentially slipping up on KYC and AML compliance requirements, most banks just don’t think it’s worth the risk.
Even in the Cayman Islands, where the government is actively trying to attract businesses in the crypto industry, local banks are still reticent to get on board. Opening a bank account in the jurisdiction is already tough, but as one Insider recently shared, when the word ‘crypto’ is uttered it triples in difficulty.
US banking regulators are concerned about providing services to crypto-related businesses and while they have not expressly prevented US banks from doing so, they have significantly increased the regulatory burden of doing so by auditing crypto-related accounts with increased frequency.
This has put US correspondent banks under tremendous pressure to ensure complete KYC and AML compliance from their foreign partners, particularly with respect to crypto-related activities.
While 99.9% of crypto-related businesses are legitimate, there is simply too much at stake for compliance officers to care. The potential benefit of taking on a crypto-related business just doesn’t stack up against the risks of losing their correspondent banking relationships.
As Insiders, you must be aware of this regulatory obstacle when launching your project. Understand that getting a bank account in your jurisdiction, no matter how ‘squeaky clean’ your crypto business is, might be impossible.
Luckily, greener, crypto-friendly pastures are out there. Lamassu has accepted the challenge of trying to find them. Will you?
Originally published at cryptolawinsider.com on February 7, 2019.
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