Any person who has tried to purchase crypto at some point knows that the process of getting money into and out of exchanges is a major pain. Mandatory cash deposits or 1-2 day withdrawal waiting periods are not uncommon in crypto exchanges, even after 2017’s boom. So why can’t any law abiding citizen pay for crypto like we pay for any other product, using a regular credit or debit card to perform an immediate transaction?
In order to understand why traders are still jumping through hoops in order to spend their money in crypto I need to start backwards, by giving you the answer. The reason is compliance. Plain ol’ compliance like every bank or stock brokerage firm goes through. I know everyone enjoys a quick read, but 15 seconds is not going to cut it, so let me clarify.
Crypto is not decentralized AT ALL. The crypto industry is ultimately run by people who need to spend dollars, pesos, yens, euros or pounds in order to survive, which means that ¼ of a bitcoin you bought needs to pass through a bank in order to be spent in dollars. Now, banks service all types of clients, crypto exchanges are only one of the corporate accounts they manage. As such, crypto exchanges need to comply with the same rules as any company, and this means vetting their customers. This initial compliance hiccup also means that if you don’t play by the banks rules when it comes to knowing who you are dealing with, major credit card companies will block transactions from cards in their network into a crypto exchange or transactions related to crypto trading. So as you can see, although crypto was hyped as being totally independent from the centralized financial system, the reality is quite the contrary. Therein, lies the crux.
I want to touch on a couple of concepts that are both murky in most people’s minds, and extremely important for anyone involved in crypto trading, they are the underlying reason cashing in and out is hard. “FIAT” (not the car, the other thing) and “On-Off Ramps” for getting money into and out of cryptocurrency exchanges.
FIAT, technically speaking, is a form of “legal tender”, a document entitling you to some value, backed by a central government. It can take the form of physical dollars (for example paper Federal Reserve notes), or it can be represented electronically, such as with bank credit. The government controls its supply and you can pay your taxes with it.
On the other hand, cryptocurrency is not “legal tender” and it is not backed, i.e. trusted by a central government or bank (it is decentralized and global), but rather trusted by people and their secondary trust in the cryptographic consensus algorithms that underlie the decentralization piece. Its form is more like bank credit sans the bank (in that it is represented digitally, but not backed by a bank or government). An algorithm controls the supply and you can’t pay your taxes with it.
So, unlike its car manufacturing homonym, the value of FIAT money is derived from the relationship between supply and demand rather than the value of the material that the money is made of or backed by. Historically, most currencies were based on physical commodities such as gold or silver, but fiat money is based solely on the faith and credit of the economy.
How FIAT complicates day-to-day Trading.
Many people have actually earned a considerable amount trading in cryptocurrencies, and now they want to cash out. The reason is some financial institutions are just not very fond of cryptocurrency markets – yet.
So, getting your money into and out of almost any exchange can be a hassle. The exchanges, obviously, have no incentive to make your life harder (quite to the contrary), however, as mentioned at the start, exchanges live within the global financial system, and this means at the end of the day, they need to bank the FIAT money that is being made by crypto trading and so do the traders themselves.
Basically, the central banks noticed how much money was flowing into decentralized assets, and perhaps they became afraid of the long-term consequences of that dynamic. There were also issues surrounding Know-Your-Customer (KYC) regulations. Most crypto exchanges didn’t have the level of customer oversight needed to interact with other financial institutions. Every financial entity has to keep extensive records about their customers, and in the crypto world, this simply isn’t standard practice.
Over the last year KYC regulations have become more important for crypto exchanges. Any exchange that wants to convert crypto for cash (FIAT) has to play by the same rules as other financial entities, and keep extensive documentation of their customers’ identity and trading activities. Although cryptocurrency exchange fees are (for the most part) affordable, they bring certain disadvantages along with them. The main one is that you cannot get instant access to the funds that you have exchanged. If you’re strapped for cash and need to have access to your funds in a pinch, chances are you won’t be able to, at least for a couple of days.
In short – banks and other financial institutions are not allowed to handle transactions that do not meet the requirements imposed on them by their official regulators, such as AML and KYC which most crypto don’t perform.
If we look at the underlying reason for exchanges to block withdrawals or deposits, we find that one of crypto’s main attributes -anonymity- also means that any trading on the currency has a higher risk of fraudulent or criminal activities. Banks, have been verifying, manually and painstakingly, their customers’ identities for years in order to minimize this risk.
In other words, banks comply with international legislation that has been developed for maximum financial transparency and security. To prevent money launderers, scammers, and other criminals to have access or corrupt the system itself. Speaking bluntly – banks and other financial institutions are not allowed to deal with these kinds of transactions by their official regulators because of fear of some users using financial institutions to their benefit, (i.e., legalizing money obtained from criminal activities). As mentioned above, there are two main policies to mitigate this issue AML Directives and KYC) Procedures:
If banks or other financial institutions deal with customers whose source of funds is unknown, they will lose their license or risk paying massive penalties.
FIAT & Exchanges / On-Off Ramps
So, banks and crypto have a complicated relationship based on the fact that crypto and exchanges have yet to adapt their standards to the global financial banking system. Similar to the relationship between crypto and regulators in the sense that both the banks and the regulators act as authorities and impose standards and guidelines to crypto and exchanges; but where does this leave the exchanges where the coins are traded? How do they collect and hold money for users and themselves when they open an account and disburse it when they cash out?
Well, basically they are left between a rock and a hard place. For instance, offshore banks that transact in US dollars must perform KYC and have solid anti-money laundering procedures in place. Any offshore bank that doesn’t follow US rules will be kicked out of the global banking system. Cryptocurrency exchanges hold money for customers. So, accounts in an exchange are a level removed from the offshore bank. If the bank wants to transact for an exchange, they’re basically required to know their customer’s customer (KYCC).
Every exchange needs to have a “way” for users to onboard dollars (or other major FIAT currencies like euros) from their personal bank accounts, into their profiles at the exchange, turn them into bitcoin (or any other) and withdraw them bank into their account, this is commonly referred to as an “On-Off Ramp”, and this infrastructure is also provided by the banks. This is important because any business needs to have a corporate bank account, for crypto exchanges the anonymous nature of the traders compounded with the currency conversion from FIAT into digital assets and back makes it extremely difficult to open a corporate bank accounts, which in turn complicates the access to an On-Off Ramp. Having no access to an On-Off Ramp means exchanges need to ask users have to bend over backwards in order to transact on their platforms.
One offshore bank for cryptocurrency skirted around US compliance guidelines by asking each customer of the exchange that wanted to transact through the bank to open an account at said bank. The exchange also holds a corporate client account at the same bank. Customers of the exchange will be allowed to send transfers from their exchange account to their offshore bank account. If John Doe wanted to send money out of his crypto account to the offshore bank, it must have come from a crypto account in the name of John Doe. However, the limitations of this particular On-Off Ramp are self-evident.
Even at first glance it seems fairly obvious that asking a customer to open a separate account at a separate entity just to transact on your exchange is a tall ask, and even more so when you look at what the document requirements are for this process . In that sense, the importance of a good relationship with a bank that allows not only corporate banking but access to an efficient On-Off Ramp cannot be understated, since not having it exponentially complicates the operation of the exchange, the user experience and almost every aspect of the operation.
Don’t panic just yet, solutions are here.
So crypto exchanges have the misfortune of needing to perform TWICE the amount of regulatory work in order to operate, once for the US or international regulators and authorities, and again with their banks in order to be able to collect the fees they charge for their services and access to On-Off Ramps. Given the speedy nature of cryptocurrency trading, asking a client to go through complicated procedures in order to spend money won’t do, this means that whatever is automatable must be automated in benefit of the user and of the exchange’s operation.
A handy solution comes from one of the by-products of the recent advancements in mobile phone cameras, reliable mobile KYC software. Being able to detect a person’s biometric features, scan an identity document and compare the data against watchlists and perform a biometric pairing of a “selfie” with the picture in an ID means that companies such as crypto exchanges don’t need to have an actual person collecting all this data, the fact that it’s done in minutes or seconds is great news for the user as well.
As we’ve established, the regulatory burden on companies in the crypto space is huge, and users suffer the most for it. Given that most companies in this space are budding companies, without large budgets, every penny needs to be properly allocated. Employing mobile KYC software also means that these companies no longer need an expensive law firm to handle all of their compliance requirements, but more importantly, these inefficiencies allow for exchanges and crypto that provide better user experience to gain a competitive advantage.
Placing software like Mati in place of traditional user onboarding means that most of the initial data collection is handled automatically, identity screening against global watchlists means these companies are de-risking their platforms from fraud while meeting AML requirements. As we mentioned, when all of these small processes are automated, and the costs of doing without them are added, compliance suddenly starts to look less daunting.
So, although the regulatory landscape is somewhat complicated (it’s mostly just tedious), new technologies mean you don’t need a degree from Harvard Law or a six figure legal budget to meet your regulatory compliance requisites, both with the banks and with regulators, a good combination of software like Mati and minimal patience and work will do the trick just fine.
 Definition via Investopedia
 KYC (Know your customer) policy states that you must provide proof of identity before you can start depositing, withdrawing or cashing out. Otherwise, you can only deal with a very limited amount of funds.
 AML (Anti-money laundering directive). In short, it states that you must provide the source of the funds if requested.
 Jointly with the major credit card brands Visa, MC, AmEx.
 If you want to maximize privacy with an offshore LLC or international business corporation, a certified copy of the corporate documents;
A notarized color copy of your passport;
A bank reference OR a professional reference letter (must include contact information of the writer so the letter can be verified);
A notarized copy of a utility bill reflecting name and home address;
FATCA and tax declarations as required by US law (the bank will prepare these for you);
A signed agreement with the bank and any supporting documents necessary;
The account opening fee charged by the bank will be $100 to $250 (FATCA fee for US persons) and the monthly account fee is $14.50.