Banks are capping crypto spending, but are they right to?

NatWest has become the latest British bank to introduce safeguards against customer spending on cryptocurrencies.

Last week, it introduced a cap on the amount of money that account holders could transfer to crypto exchanges. It means that NatWest is the latest bank to introduce controls on consumer crypto spending, following in the footsteps of Nationwide, HSBC and Santander.

The limits are far above the level that most consumers will spend on crypto – £1,000 a day or £5,000 over a 30-day period. But are they proportionate to the amount of risk facing consumers, or do they represent self-inflicted overreach?

Do consumers need protection from crypto?

NatWest believes the increased customer protection is necessary, with consumers losing over £300mn last year to crypto scams. Nearly four in five (78%) British crypto owners hold less than £5,000 in total, according to a 2021 report from crypto platform Gemini, with two in five (40%) holding less than £1,000.

The bank also argues that risk has become heightened, with the promise of high returns playing on vulnerable consumers’ desperation in the midst of a cost-of-living crisis. That goes some way to explain why NatWest has tightened its crypto safeguards now.

Explaining the decision, NatWest Head of Fraud Protection Stuart Skinner says: “We have seen an increase in the number of scams using cryptocurrency exchanges and we are acting to protect our customers.”

NatWest says that men over the age of 35 are most at risk because they are less averse to risky investment decisions, but the lack of FCA oversight of crypto means that consumers are generally not protected if an investment turns out to be a scam.

UK banks are ‘overstepping their remit’

While NatWest argues that the move is needed to protect consumers, it has not been met with universal approval. Alessandro Hatami, Managing Director of strategic consultancy Pacemakers, tells FinTech Magazine that it’s “a disturbing and overzealous trend”.

“Deciding whether to invest in a crypto exchange should be entirely up to the customer,” Hatami says. “The fact that there are scams involving crypto does not entitle banks to limit their customers' access to crypto exchanges in ways they best see fit. By implementing this policy, they are overstepping their remit while creating a perception in the market that cryptocurrencies are dangerous assets and that customers should beware.

“Instead, banks should inform their customers about the risks involved in investing in volatile assets such as crypto, making it clear that customers themselves are responsible for ensuring their investment decision is a sound one. This is similar to the way in which banks tell customers they should be careful when withdrawing cash from an ATM.”

Hatami continues: “This overreaction by NatWest and other banks could be down to a combination of fear or a lack of understanding about a technology which, when effectively regulated, will transform financial services for the better. By creating negative hype around cryptocurrencies, NatWest and others risk making customers afraid of a technology that has the potential to make their payments faster, cheaper and more secure.”

Legislation is ‘the effective way to protect consumers’

Hatami also questions the timing of the intervention, claiming it could undermine confidence in crypto just as the Bank of England is about to embark on developing a so-called ‘digital pound’. Blair Halliday, UK Managing Director of Kraken, echoes his sentiments about it being consumers’ money to spend.

Writing on LinkedIn this week, Halliday says: “The approach of introducing blanket policies to capture an entire industry isn’t an effective substitute for conducting robust due diligence and transaction monitoring. Financial institutions previously used this approach to de-risking correspondent banking rather than adopting up to date models to manage additional risks. The end result terminated business relationships and caused substantial challenges for those transacting from developing economies.

“Crypto has reached its inflection point and is now here to stay. Dedicating resources to find efficient ways to work with compliant crypto companies should now be the priority. Implementing transfer limits artificially depress demand for crypto assets, and ensures current account service providers become gatekeepers to an inclusive financial technology. Funnelling crypto banking services into a few players also creates concentration risks around single points of failure for an entire industry.

“Instead, the most effective way to protect UK consumers is by implementing well-considered legislation that enforces a regulatory perimeter. This is already in motion and we’re looking forward to seeing more over the coming months.”

There is little doubt that the crypto industry finds itself in a difficult moment. Consumer trust will inevitably have been dented by the fallout of FTX’s collapse – although a survey by the blockchain company Paxos suggests that consumer confidence in crypto has remained relatively high despite recent market volatility.

Clearly, consumers deserve protection. Many insiders want that protection to take the form of tighter regulation, not individual action. However, if a bank can limit a genuine and informed consumer’s spending on crypto, then it begs the question who's in charge of account holders’ money.