Falcon Private Bank Swoops On Crypto-Currency Bonanza, But How High Is The Risk?

Josh O'Neill Assistant Editor 10 January 2018

Falcon Private Bank Swoops On Crypto-Currency Bonanza, But How High Is The Risk?

In this article, this news service analyses the risk that the Swiss private bank is taking by allowing its clients to log crypto-currency gains on its books.

2017 was undeniably a crypto-currency bonanza.   

Before last year, digital currencies were generally seen as a niche, thought to be used only by techies and surfers of the so-called Dark Web, an online underworld where users can exchange crypto-currencies for an array of illegal products and services.

This perception soon changed when the value of bitcoin, the first and most well-known crypto-currency, rocketed from under $1,000 to as high as $20,000 in less than 12 months. Last year also saw the launch of bitcoin futures contracts, landing the crypto-currency on large exchanges used daily by Wall Street traders. 

Now, it is a daily occurrence for the mainstream press to take aim at bitcoin and discuss its most recent price swings, and barely a week passes without a prominent figure from the banking industry warning of a crypto bubble that is ready to burst. Many of bitcoin’s rivals, such as ethereum, litecoin and ripple, are even making headlines in tabloid newspapers and front pages of their websites. 

Yesterday, Falcon, the Swiss private bank, announced that new and existing clients can now keep wealth generated from trading crypto-currencies on the bank’s books. 

The Abu Dhabi-owned firm said it had “implemented a process in line with relevant compliance provisions” to allow its clients to deposit crypto gains into their private banking accounts, once they are converted into fiat currency. 

Banks have typically steered clear of crypto-currencies because of the associated money laundering risks and difficulty determining the origin of funds. Crypto-currencies, generally speaking, allow users to transact with a degree of anonymity without the need for a third-party – most banks’ worst nightmare at a time when watchdogs are hot on the heels of financial crime and regulatory fines are at an all-time high. 

But Falcon, a self-proclaimed “first-mover” in the crypto asset management space, said it “applies required due diligence using specific tools to analyse the transaction history on the blockchain to ensure full compliance with AML (anti-money laundering) and KYC (know-your-client) laws and regulations”. Blockchain, a digital ledger rendered tamper-proof by advanced cryptography, is the technology underpinning crypto-currency transactions. 

PricewaterhouseCoopers, Falcon’s auditor, has reviewed the process, it added.

Martin Keller, Falcon’s chief executive, said he anticipates “an increase in client demand” for his bank’s crypto services. Last year, Falcon added four crypto-currencies – bitcoin, bitcoin cash, ethereum and litecoin – to its roster of tradable assets. The group also ambitiously forecasted that bitcoin would “easily” hit $100,000. 

Although Falcon is clearly bullish on bitcoin, its move to allow crypto profits to be booked alongside its some $18 billion in assets under management begs the question: is the bank setting itself up for a compliance meltdown? 

Richard Howlett, a founding partner of London-based law firm Selachii who specialises in crypto-currency litigation, described Falcon’s move as “brave” but suggested it could well pay off. 

“This is a brave move in light of the general position of all banks to try and block out crypto which, if nothing else, is a competitor to traditional banking models,” Howlett said. “The industry is in desperate need of traditional banks to support crypto trading as ultimately, profits in fiat need to be held safely.”

In Howlett’s eyes, “the risk is no higher than allowing a stock trader to hold their wealth” with the bank as the “vast majority of [crypto] traders would have nothing to hide at all and can be transparent with their trading history”. 

But to crypto sceptics, the stakes may seem high. 

Global media is abuzz with reports of how criminals are using crypto-currencies to wash their dirty cash, citing warnings from government officials and central banks. Inevitably this stirs controversy, prompting questions over digital coins’ legitimacy and sparking arguments over whether they should be considered an asset class.

But are these fears justified?

As far as your correspondent is aware, there are no concrete figures estimating what portion of crypto-currencies’ $740 billion market cap can be traced back to illegal activities. Of course, this is logistically challenging to forecast, given the nature of black markets and the fact there are over 1,000 crypto-currencies in existence, all of which entail varying degrees of anonymity. 

Still, in some ways, the timing of Falcon’s move could be considered impeccable, given that many prominent jurisdictions are leaning towards regulating crypto-currencies in some way, shape or form.

The UK government, for example, said late last year that it would bring crypto-currencies in line with anti-money laundering and counter-terrorism financing legislation amid growing concerns they are facilitating money laundering and tax evasion. Across the pond in the US, the Internal Revenue Service (IRS) is treating crypto-currencies as property for federal tax purposes, meaning that depending on a taxpayer’s circumstances, crypto investments could be classified as business property, investment property or personal property. 

If this trend continues across the world and investors are increasingly obliged to file tax returns on their crypto investment gains and losses, it would perhaps seem logical to streamline this process using a privte bank’s range of services.

On the other hand, some might think Falcon’s ploy is too high-risk, in light of the bank being kicked out of Singapore in 2016 over anti-money laundering lapses linked to 1Malaysia Development Berhad, or 1MDB, the Malaysian state-owned fund dogged by an alleged multi-billion dollar global money laundering scandal. 

In Howlett’s opinion, all banks will ultimately follow in Falcon’s footsteps, but being at the forefront of the crypto race could result in “millions of pounds’ worth of business” for the group.

“All banks will eventually jump onto the bandwagon,” he said, adding that “market leaders, such as Falcon, will be rewarded greatly.”

He continued: “In my opinion, banks have some form of unwritten rule amongst themselves not to accept, allow or encourage crypto. It is a massive competitor to their traditional banking model in the long term and if they do not ultimately accept it, they will be left out in the cold and considered an obsolete bank that cannot or refuses to keep up with modern day requirements.”

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