Crypto onboarding: A multi-billion dollar opportunity for banks to tackle

June 19, 2024

According to a recent report from crypto payments firm Triple-A, there are now over 560 million cryptocurrency owners worldwide.

By far, the largest cohort in that statistic is 24–35-year-olds, of which an estimated 34 percent own crypto.

These figures show that crypto adoption is surging ahead.  And that adoption is creating new wealth.

Last year, Henley & Partners estimated there to be 88,000 crypto millionaires globally.  With the recent move in prices, that figure is now probably higher, with one estimate suggesting that crypto wealth among individuals in the US exceeds $100 billion.  

And more recently, a Capgemini survey indicated that around 71 percent of high-net worth individuals had invested in digital assets.

So what does this mean?  Well, crypto remains a young person’s game, albeit less so than before.  Older generations are playing catch up.  But more than anything else, it confirms that wealth is increasingly made – and existing wealth is increasingly bolstered – in different ways.  

Moreover, that wealth is generated by people who were not previously rich.  And the way it occurs is often fast and unique.  Its not steady wealth accumulation; sometimes its quite literally overnight success.

This inevitably presents compliance issues for regulated institutions who find themselves increasingly exposed to crypto investors, whether that’s at the point of onboarding, reviewing existing customer accounts, or undertaking pre-transaction due diligence, including on property purchases.

Which all leads to the same question: how can they assess the provenance and legitimacy of that crypto wealth?  

In many cases, the public footprint of crypto investors is small.  So the amount of online checks a bank can conduct are limited.  So forget traditional AML databases.  The way banks will solve this is by getting to grips with blockchain data to build fit-for-purpose source of funds procedures.

Wielded sensibly, the blockchain will show the wealth story - from first investment to cashing out – and provide a structure to rigorously assess financial crime risk. But there are two caveats here:

1. The bank needs to know what data to request from their customers

2. The bank needs to have the right tools and expertise in place to analyse that data

This is something Hoptrail discussed in February with our onboarding checklist. Its something we will continue to talk about a lot more in the future, particularly in the context of privacy.

Why? Because on-chain onboarding doesn't need client identifiers, bank statements, or any other non-public, sensitive data. In many ways its a clearer, safer, and more efficient source of wealth analysis than in any other asset class.

The de-banking threat to crypto investors

Recently, our CEO recalled a story on a question we get asked a lot: do we know any crypto-friendly banks?

The story was from a client who was de-banked by a major UK high-street bank.

The client made a lot of money during the 2021 bull market, mostly in one token. Hoptrail ran a source of wealth report with sight of all documentation: wallet addresses, on-ramps, off-ramps, trading history, staking data, the lot. And there were no red flags.

In many ways, it was a classic crypto wealth story: rapid and innovative, using new techniques.  But to a non-crypto person, the story might seem outlandish, too fast, complicated and fraught with risk.

The high-street bank concluded that there was a risk with an address the customer had interacted with and terminated the customer's accounts.

So what did the bank know? Or suspect they knew?

At the time, the bank was running a trial with a blockchain analytics platform.  The type of platform typically used by law enforcement for complex, multi-jurisdictional asset tracing cases. The type of platform that will show you red flags beyond your customer’s activity –five, ten, even 100 ‘hops’ away.  

Because these are data-driven SaaS platforms, there won't be any immediate context or insight on whether indirect red flags are relevant to your customer.  

In some cases, red flags occur well after the client activity has concluded, but the data will still show a risk. You’ll get a traffic light that is blinking red; or a tracing chart that appears to show a connection between your customer’s address and a red flag.

False positives in the context of AML checks remain a real danger for crypto investors. Tech alone will not solve the wealth analysis issue (yet).

We’ve since received several reports of customers being questioned by banks to prove their crypto wealth.  For the most part, these customers are armed with Hoptrail reports which have helped to keep them in the banking system.

But for those that don’t, it can be extremely difficult to navigate, particularly for those long-term holders. They may not retain documentation on historic purchases, or obtain a trading statement from a defunct exchange.  They may not have a record of all of their wallet addresses.

The role of blockchain analytics platforms

All this leads to another question: are blockchain analytics platforms inadvertently driving customer de-banking?

More to the point, is it wise to use a law enforcement-focused tool to monitor and manage retail customers in a financial services context? Almost certainly not.

The blockchain is an incredibly powerful compliance tool.  But it needs to be wielded with care.  Because its possible to see so much, red flags are seemingly everywhere.  And without sufficient context it may appear that your client has engaged in illicit activity, without them having done anything of the sort.

For a bank, it may be better to close a person's account than get it wrong.  It may be easier to do that than spend time and money digging into the details to get it right.

Because of this, banks are missing out on a multi-billion dollar opportunity to solve the crypto onboarding pain point. 

In truth, some institutions are getting serious about crypto wealth analytics.  But the approach needs a serious re-think if crypto and traditional finance are going to interlink seamlessly.

Media & Press

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HM Treasury applies first-ever crypto sanctions amid coordination with US and Israel

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