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Partner Kate Gee comments in relation to how upcoming crypto regulation may impact banks and other financial institutions’ business practices.

Kates comments were published in FT Banking Risk and Regulation, 9 October 2023, and can be found here, and also in The Banker, 26 October 2023, here.

When JPMorgan Chase recently banned its UK retail clients from using their accounts to purchase crypto assets, it provoked surprise.

Commenting on crypto regulation and the banking sphere, Kate said:

“With the digital asset space forecast to grow to trillions of dollars of assets, it is not surprising that financial institutions want to lay the groundwork for greater involvement in the sector. A market with that level of expected growth and value will inevitably be seen as a priority for banks, companies and investors, who will each need to balance their potential rewards versus the risks to them of participating in the crypto space.”

“Deutsche Bank’s recent partnership with cryptocurrency infrastructure platform Taurus is intended to enable the bank to offer cryptocurrency custody services and to support its clients in the broader digital asset ecosystem.  It follows similar strategic moves made by Standard Chartered – working with Zodia Custody to provide digital asset custody services to its clients – and Societe Generale, whose crypto unit “Forge” became licensed in July to offer services, including crypto custody, trading and sales in France.”

“The appeal of the crypto sector is on the rise, notwithstanding the recent uncertainty and volatility in crypto-asset markets.  Whereas to date the impact of crypto company implosions has mainly been felt by other crypto companies or banks with a significant exposure to the sector (see, for example, SVB and Signature Bank), it seems inevitable that the ripple effect will be more significant and felt across a broader spectrum of the financial services industry as large financial institutions increase their involvement in and exposure to the sector.”

“2023 will be seen as an important year for crypto regulation – with significant progress towards consistent and effective standards at the EU and international level to regulate the wider crypto-asset ecosystem.  In the UK, the next step is the imminent implementation of the FCA’s new rules for marketing cryptoassets to consumers in the UK – it comes into force on 8 October 2023.   The legislative changes are designed to prevent the marketing of cryptoassets outside of narrow exemptions or by authorised persons and MLR-registered firms.  The new regime will also enable the FCA to moderate and monitor promotion of crypto products.   Importantly, the general restriction on financial promotions will apply to domestic UK cryptoasset firms, and also to firms outside of the UK whose financial promotions are communicated from offshore but which are capable of having an effect in the UK.”

“The new rules will bring crypto assets within the remit of regulation with which large financial institutions are already familiar, but even so those institutions will need to revisit and refresh their compliance policies to ensure that they are and remain compliant.”

“Of course, financial institutions will need to take particular care when interacting with retail customers. In fact, certain banks in the UK have taken a firm stance on crypto in response to regulatory concerns around buying digital assets and the risk of financial crime in the sector. Although their stated intention is to protect investors from bad actors in the space, the flipside is of course that the bank protects itself from future claims by customers who have been defrauded in the crypto space. In March this year, Nationwide banned credit card payments to crypto exchanges and limited current account payments to £5,000 pounds per day. JP Morgan Chase recently announced that it will ban customers from making any payments using cryptocurrencies from 16 October – going beyond the restrictions implemented by other UK banks.”